Overview
“The US is within striking distance of the 2% inflation goal, but the central bank should not rush to cut its benchmark interest rate.”
US Federal Reserve Governor Christopher J. Waller (Jan 16, 2024)
The Risk-On appetite in asset markets in the final two months of 2023 took a breather in January 2024, as investors dialed back their enthusiasm for early and concerted rate cuts. From a recent low of 3.9% attained in Dec’23, the 10-year UST yield has risen back to around 4.1% at end-Jan’24. Yet, the yields are at 15-year high providing a window of opportunity for the investor.
Economic outlook remains sanguine
Despite the steep rate hikes, US GDP grew at annualised rate of 3.3% for 4Q23 (3Q23: 4.9%); thus, expanding by 3.1% for 2023, making US the fastest-growing advanced economy last year. This was aided by record fiscal deficit, which has spurred multi-fold increase in capex.
Figure 1: Fiscal Deficit: 7.4% (adjusted) in FY23 | FY24 est. 5.9%
Figure 2: Construction Spending on Private Industrial/Manufacturing Facilities, Inflation Adjusted
- Source: Guggenheim, CBO, Have Analytics, Jan 2024
The capital formation, as always, would have multiplier impact on the economy.
The unemployment rate stayed low and unchanged at 3.7% for December 2023 but is expected to cool down in the coming months. According to the Atlanta Fed, employment needs to rise by ~108,000 jobs per month to keep the unemployment rate unchanged.
Figure 3: Both a Low Unemployment Rate and Initial Jobless Claims
Suggest the Labor Market Is Still Reasonably Tight
The household real income has turned positive, with wages outpacing inflation for 7 straight months, after 25 consecutive months of negative real wage growth.
Price pressures continue to dissipate globally
While inflation continues to trend towards the 2% level, the final descent could be bumpy, due to sticky services inflation, geo-politics, elections, earnings divergences, etc. For Dec’23, US CPI rose marginally to 3.4% YoY (Nov’23: 3.1%, Jan’24 est. 2.96%), while Core CPI came higher at 3.9% (Nov’23: 4%). The Fed’s preferred inflation measure, PCE is expected at 2.2% (compared to 2.6% in Dec) with the Core PCE near 2.7% (versus 2.9% in Dec’23). UK also notched an unexpected rise in inflation at 4%, while Eurozone notched-up to 2.9%.
Technical tailwinds for bonds
Money market funds are awash with over US$ 8.5 trillion waiting to find home as against muted supply. Less than 4% of US HY bonds (less than half of normal levels) are due for maturity / refinancing in 2024; thus, providing strong tailwinds to fixed income assets.
- Source: Guggenheim, Bloomberg, Factset, Nov 2023
- Source: Bloomberg and Alliance Bernstein, Dec 2023
Markets front-running rate cuts
Major central banks globally have hinted rate cuts in 2024, with Fed signalling 0.75% rate cuts, while markets
are pricing 1.25% rate cuts (down from 1.5% in Dec’23). The Fed will be cautious and data-dependent when it comes to cutting interest rates given that the economy and labour market remains resilient.
Figure 4: Fed Pivot and Market Expectations
The elections and geo-politics overhang, will induce higher market volatility, favouring active fund management.
Window of opportunity in fixed income
Yields have retreated from their highs touched in October 2023 but are still close to their 15-years high.
Figure 5: Yields offer carry and buffer against further yield rises
Rather than being caught in recency-bias, the investors should capitalize on yields being twice the median yield.
Source: Bloomberg, Silverdale Capital, Jan 2024
Figure 6: Yields offer carry and buffer against further yield rises
Thus, providing cushion against spread widening or unexpected increase in interest rates.
Figure 7: Yields offer carry and buffer against further yield rises
January 2024 Performance
For January 2024, the Bloomberg Emerging Markets Asia Total Return Index returned 0.3% and the Bloomberg EM USD Corp and Quasi 1-3Yr Index rose 0.6%. In comparison, the Silverdale Bond Fund NAV increased by 1.9%, and the NAV for various Silverdale Fixed Maturity Funds increased between +0.7% to 2.1%. The flagship Silverdale Bond Fund remains well-positioned to take advantage of the prevailing high carry offered by high-quality bonds, holding 78% Investment Grade bonds, with a duration of 2.1 years, yet offers a leveraged YTM of 9.95%, pointing to higher potential returns.
The investors who prefer higher assurance of returns versus potential capital gains, would do well to lock-in the current prevailing high yields through Fixed Tenure Funds. Silverdale Fixed Tenure Fund November 2027 continues to accept further subscription.
We are grateful to you for your unwavering support.
DISCLAIMER
THIS COMMENTARY IS AN INTEGRAL PART OF AND SHOULD BE READ ALONG WITH THE FUND FACTSHEET FOR JANUARY 2024. This document is written for the benefit of and is being communicated exclusively to Accredited Investors or Institutional Investors as defined under the Securities and Futures Act (Cap. 289) of Singapore. The above commentary does not provide a complete analysis of every material fact regarding the market, industry, security, portfolio, or any Silverdale fund. It is not a recommendation to buy or sell any security nor an investment advice. The portfolio holdings, opinions and information may change without notice and the actual results may differ from the said opinions and estimates. The contents of this document, including any narrative, does not constitute an offer to sell or a solicitation of any offer to buy the units or any Sub-Fund or class of the Silverdale Fund VCC (the “Fund”) or any of the funds managed or advised by Silverdale Capital Pte Ltd., and is strictly for educational purpose only. The distribution of the shares of the Fund may be restricted in certain jurisdictions. It is the responsibility of the person or persons in possession of this communication to inform themselves of, and to observe all such restrictions, all applicable laws, and regulations of the relevant jurisdiction, including of any applicable legal requirements, exchange control regulations and taxes in the countries of their respective citizenship, residence, and domicile. Any subscription for units or shares must be made solely based on the Fund’s private placement memorandum, applicable class supplement) and Subscription Documents (together “the Offering Documents”). Past performance is not an indicator of future performance. The Fund uses leverage and invests in financial derivative instruments. Please refer to the Offering Documents for Risk Factors. Nothing in this document is intended to constitute legal, tax, securities or investment advice or opinion regarding the appropriateness of any investment, or a solicitation for any product or service. Please seek opinion from an independent professional adviser before taking any decision based on this document.
- Source: Alliance Berstein, Macrobond, Dec 2023
- Source: Bloomberg, Silverdale Capital, Jan 2024