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07 Oct 2021

Markets in a nutshell — September 2021

Global equities fell after seven straight months of gains. US bourses underperformed as tapering considerations pushed rates higher and economic growth concerns grew. European stocks also fell as energy concerns, supply chain bottlenecks and component shortages hurt production.

Emerging markets were not spared, dragged lower by Brazil after the central bank raised interest rates for the fifth time this year. China underperformed as economic data signalled its first post-COVID contraction and growing concerns for energy supply constraints and the potential fallout over Evergrande.

Developed market bond yields rose on worries that rising global inflation may not be as transitory as first believed. While US Federal Reserve Chairman Powell continues to walk a fine monetary policy line, it is becoming increasingly probable the US Fed will begin its bond tapering program within the next two months. We continue to expect a lift-off in rates sometime in 2022. The US dollar advanced strongly against the other majors, with investors now more actively positioning for a moderation of the prevailing accommodative US monetary policy and the subsequent rise in interest rates.

Industrial commodities iron ore and copper fell on concerns of a slowdown in Chinese economic growth, compounded by Chinese power supply constraints as oil, gas and coal rose sharply as alternatives. Precious metals platinum, palladium, silver and gold moved lower on US dollar strength, with palladium impacted by continued auto production problems.

At sector level, materials continued to fall as most commodities tumbled on a combination of US dollar strength and weaker global growth expectations. Information technology, utilities and communication services also fell, with only the energy sector positive on supply concerns for oil and gas driving prices higher.

In the Foord International Fund, the US S&P 500 market index hedges protected investor capital, while copper miner Freeport-McMoRan and gold streamer Wheaton Precious Metals detracted. The Foord Global Equity Fund’s Chinese holdings, communication services and discretionary sector holdings were the primary drivers of the fund’s relative underperformance this month as negative short-term sentiment continued to grip Chinese equities.

Despite a meaningful allocation to Chinese equities (11% in Foord International Fund and 27% in Foord Global Equity Fund), the funds are well diversified globally. The Chinese authorities have certainly tightened the regulatory environment significantly over the last year, to improve governance oversight across high-profile industries. These policy changes have undoubtedly increased investment uncertainty in the short-term. But the long-term results of these regulations should drive healthier economic development, helping China towards its goal of reducing income and wealth inequalities. The government wants to build a stronger middle-class, to advance innovation and get stronger as a nation. The objective does not appear to be the rejection of a market driven economy. In fact, the government continues to view vibrant private enterprise to be the most effective way to drive innovation and wealth creation, thereby fulfilling its ‘common prosperity’ goals. But private enterprise needs rules and regulations to keep playing fields level, and to weed out bad actors from the market.  

Foord has held a positive view on the rising Chinese middle class and the corresponding consumption growth. This thesis is aligned to the Chinese government’s goal of common prosperity and a ‘stronger middle’. In fact, core fund holdings like JD.com and Tencent have always created positive value across their ecosystems. In our view, these businesses (and others) present exceptional long-term value as they trade at deep discounts to their long-term earnings fundamentals.

The Foord funds have a meaningful allocation to real growth assets with long-term pricing power, given the increasing risk of rising inflation in the years ahead. This is carefully balanced by high levels of liquidity and some embedded optionality given the elevated potential for nearer term market volatility. The funds are well positioned to protect investor capital and deliver meaningful real returns over the full investment cycle.

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