Markets in a Nutshell - October 2022

Developed market equities rallied, with US bourses outperforming. Despite rising bond yields, the US Dow Jones Industrial Average posted its best October on record as third-quarter US GDP surprised on the upside. European equities also rose as investors looked through the European Central Bank’s rate increase to the perceived dovish tone in the accompanying statement which hinted at a slower pace of rate hikes than previously expected.

Emerging markets were mixed but underperformed in aggregate, led lower by a sharp decline in Chinese stocks after the precedent-breaking extension of President Xi’s tenure and consolidation of his power base. Coupled with little guidance on the lifting of the puzzling zero-COVID policies, this triggered the steepest five-day decline in the history of Hong Kong’s HSI. Strong domestic currencies, elevated commodity prices, political optimism, and a reallocation of funds from Russia fuelled gains in Brazil and Mexico.

Most sectors were positive with energy and industrials leading the gains as energy companies reported glowing earnings and oil prices gained on OPEC’s discussion to cut output. Industrials were supported by relatively strong earnings reports.

Developed market bond yields diverged as US yields rose while European sovereign yields declined. The Bank of Japan, a marked outlier, continues to hold rates down through market manipulation. The Japanese 10-year bond yield is little changed since the beginning of the year, while other developed market yields have risen notably, which has caused a significant depreciation of the Japanese yen (-22.5% year to date vs the US dollar). Potential instability in the world’s second largest bond market continues to be a significant tail risk possibility.

Industrial commodities oil and copper and soft commodities wheat, corn and soybean were mixed as supply constraints and recession fears pulled in opposite directions. Precious metals were also mixed with gold continuing its steady decline on rising US dollar real interest rates. The managers remain cautious of commodities in aggregate given the rising probability of a global recession but maintain a meaningful allocation in specific materials companies with strong longer term fundamentals.

In the Foord International Fund, US agricultural chemicals company FMC and copper miner Freeport-McMoran contributed the most to fund returns while the short S&P 500 futures hedge detracted most in what we regard as a bear-market rally. Importantly, with its conservative approach, the Foord International Fund has continued to defend investor capital this year, with the fund falling -6.9% against a global equity market decline this year of -20.1%.

In the Foord Global Equity Fund, the full allocation to select consumer services and consumer discretionary companies (many of which were caught up in the negative China sentiment) were the main detractors. The managers maintain high conviction in these positions. The Foord Asia ex-Japan fund similarly underperformed on the higher than benchmark allocation to the sectors most affected by the China sell-off.

In summary, we don’t think that global financial markets are out of the woods just yet. As such, the protection of capital and the management of risk remains the priority. Foord’s portfolios are balanced, well-diversified, and positioned to deliver meaningful inflation-beating returns over time.