Performance Review: September 2021

Wednesday, 12 October 2021
Written by Nazifah Mohd Arshad, Senior Portfolio Manager of GAX MD

Broad equity indices in the United States were down across the board in September, stemming from the Chinese real estate contagion threat, despite the many positive headlines on the improving Covid-19 situation. The Standard and Poor's 500 (S&P 500) dove 4.8% last month, making it the worst-performing month since the height of the pandemic in March 2020.

Falling sentiments were headlined by the systemic risk from China’s Evergrande crisis and its potential negative impact on the broader real estate market, coupled with the likely tapering of quantitative easing by the year end by the Federal Reserve (Fed). The pressure for tapering comes from the continuing pace of recovery and the Fed’s view that the period of high inflation may last longer than expected.

Major European indices ended the month with falls on worries about a slowing global economy while a surge in government bond yields drove investors out of high-growth sectors such as technology into economically sensitive banking and energy stocks. In September, the benchmark stock market indexes of Germany and France – the DAX and CAC 40 – registered declines of 3.63% and 2.40% month-on-month(m-o-m) respectively. The FTSE 100 Index of the London Stock Exchange also dropped 0.47% m-o-m.

Meanwhile in China, the Evergrande saga and energy shortages in the industry may weigh on the country’s growth. Its September manufacturing Purchasing Manager’s Index (PMI) by the National Bureau of Statistics showed an unexpected slip into recession territory for the first time since February 2020.

The People’s Bank of China (PBOC) vowed to provide ample liquidity for the financial sector. Officials have also announced that home buyers and small investors will be protected. Local governments are also trying to facilitate debt restructuring and selling off of assets. These measures may prevent contagion and systemic risk. Nonetheless, Evergrande’s default risk would push up the financial cost for other players in the property sector. In fact, the real estate and construction sectors account for a combined 14.5% of China’s gross domestic product (GDP). Therefore, heightening risk and its spillover would thus become a headwind to economic expansion.

The yield on the benchmark 10-year US Treasury (UST) increased in September from 1.30% to close at 1.52% at month-end. The yield rose by 22 basis points (bps) as the Fed inches closer to pulling away its emergency pandemic stimulus.

The ringgit depreciated 0.72% to RM4.19 against the dollar in September due to the change in the greenback’s outlook, which strengthened on growing expectations that the Fed will announce the tapering of its asset purchases in November and start tapering in December if the macro data on the labour market’s recovery and economic growth data remains good. But if the data is not strong enough over the next two months, we foresee that the Fed will move its tapering timeline to the first quarter of 2022.

Chart 1: Functional Portfolios' Performance for the month of September 2021

Source: GAX MD Sdn Bhd, October 2021
Note: Past performance is not an indication of future performance

Growth Portfolio

MYTHEO’s Growth portfolio recorded a negative return of 3.09% for the month of September, mainly attributed to the negative performance of its heavyweight ETFs comprising Invesco QQQ Trust (QQQ) and Vanguard Value ETF (VTV) which dipped 5.79% and 4.50% respectively.

Income Portfolio

The Income portfolio recorded a -0.39% return in September due to the negative performance of the portfolio’s heavyweight ETFs. The iShares 7-10 Treasury Bond ETF (IEF) and iShares International Treasury Bond ETF (IGOV) recorded -1.66% and -2.64% returns respectively in the month of September. The performance was in line with the performance of 10-year UST which increased by 22 bps in September to close at 1.52%.

Inflation Hedge Portfolio

The Inflation Hedge portfolio registered a -2.32% return in September, mainly due to the negative performance of its heavyweight ETFs, namely iShares U.S. Real Estate ETF (IYR), iShares Gold Trust (IAU) and iShares TIPS Bond ETF (TIP) which registered -5.88%, -3.24% and -1.47% respectively.

It must be noted that the actual portfolio returns to the investors is the combined weighted return from the allocation to each functional portfolio. For example, if an investor allocates the investment 40% in Growth, 40% in Income and 20% in Inflation Hedge, the actual portfolio return is -1.94% (40% x -3.09% + 40% x -0.39% + 20% x -2.32%).

Note: Past performance is not an indication of future performance

MYTHEO’s rebalancing exercise in September led to some changes in the ETF’s weightage allocation in the Growth portfolio. The most significant change was the increase of exposure in iShares MSCI Germany (EWG) from 2.59% to 4.08% and the decrease of iShares MSCI United Kingdom (EWU) from 7.81% to 6.43%.

Our Thoughts 

We believe that we are still in the early innings of the cycle and that strong economic and earnings growth, as well as the relatively low rates through 2022 should support higher equity prices and sustain the market. We believe that the recent market correction is temporary given that the equity risk premium (ERP) has been well above its long-term average for the past 10 years, suggesting that stocks are undervalued for the relative risk/reward they offer.

‍Nevertheless, uncertainties remain due to a rebound in COVID-19 infections, largely driven by the spread of the Delta variant in areas with low vaccination rates. The authorities are unlikely to reintroduce lockdowns, but local restrictions may be tightened in certain areas. It would weigh on services in these areas, while the overall economic recovery is likely to continue.

It is clear that the investors who diversified some of their investments into the offshore market would have enjoyed a better return at this point in the year. Investing offshore is no longer complicated given the advent of new technology. A digital investment platform like MYTHEO is here for you to achieve your long-term financial targets by investing in the global markets in an easy and affordable way.

This material is subjected to MYTHEO's Notice and Disclaimer.

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