Balanced ETF portfolios SGD Q1 2024 commentary

Quarterly net returns*

*Performance in SGD as of 31/03/2024 net of all costs including management fees and ETF TER.

Market review

Over the first quarter of 2024, financial markets saw mixed performance. Equity markets and riskier fixed income assets produced positive returns, whereas the higher quality end of the fixed income spectrum ended the quarter in negative territory. Upside surprises in economic data spurred investor appetite for risk assets. Contrarily, stickier than anticipated inflation prints served to push out expectations for the timing of interest rate cuts to the second half of the year and reduced the number of expected interest rate cuts for 2024 by half, which ultimately drove bond yields lower. Geopolitics also loomed in the background with the Gaza war, Russia’s invasion of Ukraine, and US-China competition posing potential tail risks, however not to an extent as to derail the market momentum.

Developed Market Equities performed strongly across the board. Japan emerged as the top-performing market, owing to a combination of a weaker yen and a series of government reforms, including the termination of their negative interest rate policy. US Equity market returns continued to display signs of concentration, however the “Mag Seven” saw some divergence with Nvidia, Microsoft, Meta and Amazon serving as core positive drivers of index returns, whereas Apple and
Tesla finished the quarter in negative territory. European Equities lagged their Developed Market counterparts, yet saw a strong rally in March as stronger economic data and attractive valuations drove positive investor sentiment for the region. 

Emerging Market Equities broadly lagged Developed Markets over the quarter, however Chinese equity markets rebounded strongly, following brighter economic activity data and supportive interventions from the People’s Bank of China. From a sector perspective, Communication Services, Energy and Technology led the way, whereas Real Estate provided negative returns.

Fixed income markets saw mixed performance throughout the quarter. Sovereign Bonds and Investment Grade Credit provided negative returns, as the timing of interest rate cuts was pushed out to the second half of the year and the number of cuts reduced by over half. Global High Yield provided positive returns, however, benefiting from lower interest rate sensitivity and the prospect of easing financial conditions.

Elsewhere, the performance of commodities was strong over the period. Oil prices rose significantly off the back of tightening global supplies, better than expected consumption, and geopolitical risks, notably in Russia and the Middle East. Despite a stronger US dollar, the prospect of interest cuts in the second half of the year was enough to spur a rally in Gold. Strong central bank buying and safe-haven inflows amid growing geopolitical tensions also boosted demand for the precious metal.  

Performance review

Multi-asset
All models achieved positive returns and outperformed their respective benchmarks.

Overall equity exposures contributed to model returns, driven by a broad-based rally across markets and asset classes. This was largely attributed to global economic data that exceeded expectations and supported the narrative of a ‘soft landing’. In particular, US equities contributed to both absolute and relative performance, driven by continued strong earnings growth of the “Magnificent Seven” stocks and sustained optimism around the artificial intelligence (AI) theme.

On the fixed income side, overall bond allocations delivered positive results. Gold, which serves as a non-traditional diversifier, also contributed to relative returns.

Fixed income
The income model achieved positive returns in March.

Fixed income markets experienced broad gains in March driven by a broad-based rally across markets. This was largely attributed to global economic data that exceeded expectations and supported the narrative of a ‘soft landing’. Riskier fixed income exposures such as high yield corporate bonds and emerging market debt emerged as significant contributors.

Equity
The equity model achieved positive returns in March and outperformed its benchmark.

Overall equity exposures contributed to model returns, driven by a broad-based rally across markets. This was largely attributed to global economic data that exceeded expectations and supported the narrative of a ‘soft landing’. In particular, US equities contributed on an absolute basis, driven by continued strong earnings growth of the “Magnificent Seven” stocks and sustained optimism around the artificial intelligence (AI) theme.

Portfolio allocation

Latest rebalance rationale

Multi-asset
A modest risk-on positioning is being maintained through an overweight to equities.

Within equities, an overweight position to the US is being maintained as broad analyst sentiment and earnings growth expectations continue to appear strong, relative to other regions. Within US equities, a small overweight position to US technology is being maintained due to expected positive growth potential in the sector. Rotating from ESG to a broader US index is being made for more precise exposures relative to benchmarks, and better active risk control, given heightened dispersion across markets. Favorable positioning on Japan is being maintained where there is a modest overweight, as the macro backdrop remains supportive for growth and monetary policy stays accommodative. Underweight positioning in emerging markets is being maintained more broadly, with exposures split into emerging market ex-China and China to offer more flexibility in implementing emerging market views. Lastly, a position to minimum volatility is being maintained in anticipation of market volatility.

On the fixed income side, a nearly neutral portfolio duration is being maintained, as contradictory forces in markets are keeping interest rate volatility elevated. Preference is given to holding more in short to medium-term fixed income exposures, given attractive yield levels and the anticipation of the Fed recalibrating rates lower later in the year. In the credit space, preference is given to investment grade over high yield, due to solid fundamentals of investment grade issuers and expected increase in default rates of riskier issuers. Exposures to emerging market debts are kept close to neutral with a small tilt towards government debt.

Within alternatives, the allocation to REITS is being removed, given challenging fundamentals and limited diversification benefits against equity, while maintaining an allocation to TIPS, as inflation levels are likely to stay above central bank targets for the foreseeable future. Exposures to GOLD are also being maintained, as the asset can provide diversification amid heightened geopolitical risk.

Target income
The portfolio yield is approximately 6%. Corporate credit exposures, including both investment grade and high yield, are being trimmed, and allocation to US treasuries and emerging market debt is being increased to further diversify the portfolio’s income sources and reduce exposure to spread risk. A low portfolio duration of approximately 2 years is being kept, as rate markets are expected to be volatile from uncertainty over monetary policy, inflation and political risks. Moreover, short-term securities are being held to generate attractive carry with relatively low duration risk, which is believed to be especially attractive in an inverted yield curve environment.

Equity
An overweight position to the US is being maintained, as broad analyst sentiment and earnings growth expectations continue to appear strong relative to other regions. Within US equities, a small overweight position to US technology is being maintained due to expected positive growth potential in the sector. Rotating from ESG to a broader US index is being made for more precise exposures relative to benchmarks, and better active risk control, given heightened dispersion across markets. Elsewhere in developed markets, favorable positioning on Japan is being maintained where there is a modest overweight as the macro backdrop remains supportive for growth and monetary policy stays accommodative. Underweight positioning in emerging markets is being maintained more broadly, with exposures split into emerging market ex-China and China to offer more flexibility in implementing emerging market views. Lastly, a position to minimum volatility is being maintained in anticipation of market volatility