What happened in Q3

Top 3 investment trends

1. Volatility briefly returns to the market

Markets have shown resilience despite earlier volatility. The S&P 500 posted its strongest gains of the century so far, and the Bloomberg Global Aggregate Index is on track for its fourth best quarter of the century. This marks a significant turnaround from earlier in Q3, when a spike in volatility was triggered by unexpected US unemployment data and a surprise rate hike by the Bank of Japan (BoJ), causing the Volatility Index (VIX) index to briefly reach levels last seen in March 2020.

Japan’s Topix Index dropped 12.2 per cent due to the unwinding of the popular ‘yen carry trade’, which triggered panic selling within the market. Earnings releases while strong, also fell below investor expectations. This led to a pullback in the S&P 500 and the ‘Magnificent Seven’ stocks and into more defensive sectors, which have outperformed this quarter.

However, as central banks began lowering interest rates, investor confidence improved, easing fears of a slowdown in economic growth. This has been supported by improving US economic data (such as falling initial jobless claims) and China's recent stimulus announcements. 

2. Interest rate cuts continue

Interest rates have been a major focus for investors with the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE), all reducing interest rates.

In the US, after keeping rates steady for 14 months, the Fed cut its benchmark policy rate by 50 basis points (bps). While this was a largely unanimous decision by the Fed (11-1), market expectations were split between a 25 and a 50 basis points reduction, as larger cuts often signal concerns about a recession. However, Fed chair Jerome Powell framed the move as a “recalibration”, expressing confidence that inflation is on track to reach the two per cent target, and aiming to prevent further weakening in the job market. Looking ahead, according to the Summary of Economic Projections (SEP), the Fed expects an additional 50bps cut by the end of 2024, with two Federal Open Market Committee (FOMC) meetings remaining this year.

In contrast, the ECB cut rates by 25bps to 3.5 per cent in September, responding to signs of economic slowdown and inflation nearing a three-year low of 2.2 per cent – close to the two per cent target. Markets are predicting a 90 per cent chance of another 25bps cut in October, following contractionary purchasing managers’ index (PMI) data. Germany’s labour market has been hit particularly hard, with job shedding at the fastest rate in over 15 years, excluding the pandemic.

Similarly, the BoE lowered UK interest rates by 25bps to five per cent in August, a decision reached by a narrow vote (5-4). Rising energy prices and higher services inflation are expected to drive the consumer price index (CPI) back up later in 2024.

3. China introduces a new stimulus package

Economic growth concerns saw the government announce a substantial stimulus package to boost domestic demand and stabilise the property market, supporting Chinese and China-exposed equity markets.

In late September, China’s central bank (PBOC) introduced a $570 billion stimulus package to boost domestic consumer demand and stabilise its struggling property market. This includes increased fiscal spending, monetary easing and targeted measures for the property and financial sectors – marking a significant shift from the government’s previously cautious approach. Following the news, Chinese equities rallied with the CSI 300 posting its best weekly performance since 2008, gaining 15.7 per cent. Copper, a key commodity for China, also saw its biggest weekly gain since May, driven by hopes of increased consumption.

However, despite the initial positive market reactions, some investors remain cautious and are waiting to see if the Chinese government will introduce further fiscal support to ensure a sustained economic recovery.

How did we position MAF Core and MAF Plus portfolios?¹

Growth assets

Emerging market (EM) and Asia Pacific ex Japan equities were the best performing equity markets this quarter, supported by China’s stimulus measures.

In contrast, North American and Japanese returns were weaker for sterling investors in Q3. In the US, there was a shift away from large-cap tech stocks to more defensive, value-oriented sectors resulting in the S&P 500 outperforming the Magnificent Seven for the first time since Q4 2022. Japanese equities were negatively impacted by a stronger yen.

Within MAF Plus, our overweight position in European equities (particularly defensive sectors like European banks) contributed positively, while tactical positions in North American and Japanese equities detracted from performance.

During the quarter, we made the following changes in MAF Plus: We reduced our overall equity overweight. We closed our US equity option strategy to reflect the lower equity risk, and exited positions in European banks and US healthcare stocks to lock in profits. We also closed our overweight in Japanese equities due to the strengthening yen. We closed our long US - short EM relative value trade following China’s stimulus measures.

Defensive assets

Fixed income assets performed strongly, supported by dovish signals from key central banks. The ECB, the BoE and the Fed all cut rates, with the Fed’s surprise 50 basis point cut in September driving a rally in global sovereign and credit markets. Our global sovereign bond allocation was the top performing within the defensive sleeve. In particular, market expectations for further rate cuts by the Fed this year saw US Treasuries advance for a 5th consecutive month, for the first time since 2010.

In MAF Plus, an overweight position in gilts added value, while a short position in Japanese government bonds (JGBs) detracted from performance as the BoJ signalled caution regarding further rate hikes.

During the quarter, we reduced our underweight position in JGBs by half given recent political changes in Japan with a new prime minister, Shigeru Ishiba, and currency appreciation.

Alternative assets²

Alternative assets within MAF Plus delivered a positive return in Q3 driven primarily by our gold holding. Gold has benefited from increased markets expectation of rate cuts, posting its best quarterly performance since 2016.

Market outlook and positioning

Both MAF Core and MAF Plus take a global approach to multi-asset investing, offering a more diversified profile compared to regional multi-asset portfolios. Looking forward we expect equities to perform well in a disinflationary environment, with central banks cutting interest rates, though we are closely monitoring for any signs of broader economic weakness. Central bank easing and renewed concerns about growth risks should likely place a ceiling on bond yields. In this scenario, fixed income is well-positioned to offer diversification within the portfolios.

From an active asset allocation perspective in MAF Plus, we maintain a long position in equities focusing on specific regions. Regionally, we are overweight in US and European equities. Despite recent volatility, US equities have maintained strong valuations with companies continuing to deliver solid earnings, though slightly below elevated market expectations. European equities are attractive from a valuation perspective too, with promising signs that these companies can deliver better growth. 

In our fixed-income allocation in MAF Plus, we have two key tactical asset allocation positions: short Japanese government bonds and overweight UK gilts. We believe Japan remains in a rate-hiking cycle due to increasing inflationary pressures, with the BoJ raising rates again in July. Meanwhile, in the UK, inflation is falling and while UK growth has started to recover, it is still relatively weak compared to other developed economies. Given this, we believe our gilt position would benefit from the increasing likelihood of additional rate cuts by the BoE, in contrast to the Fed.