Fund Return 2024-2025

Graph of returns to 31.03.2024

For now please click here to see a graphical illustration of funds to 31.03.2024

Investment Commentary

Provided by Mercer - CERS Investment Adviser

Market Developments

Global equities and fixed income generally posted positive returns in August. US equities underperformed international equities and outperformed emerging market equities. For both international and emerging market equities, the weaker US dollar was a significant tailwind. In local currency, performance for both was close to 0.5%, compared to returns of 2.4% for US equities. Value outperformed growth during the month (as measured by the Russell 3000).

In early August, some economic data releases indicated that the US economy was slowing faster than expected. Nonfarm payrolls for July surprised to the downside, causing a sell off in equity markets because of recessionary fears. The unemployment rate rose to 4.3% (from 3.8% at the end of March 2024), suggesting that the labor market was slowing faster than expected. At the same time, the Bank of Japan announced a more hawkish than expected monetary policy decision and rhetoric that caused an unexpected sharp appreciation in the Japanese yen. In combination, this created a perfect storm as leveraged trades funded in cheap yen had to be unwound just as market sentiment deteriorated, which magnified what may have otherwise been a more muted response to these macro data releases. Equities sold off sharply for a few days in early August, especially in Japan, which suffered its worst one-day drawdown since the Black Monday crash in 1987. Equity market volatility hit its highest level since the Covid shock of 2020.

Volatility eased shortly thereafter, and markets recouped drawdowns losses as the Bank of Japan reaffirmed their commitment to financial stability, the unwinding of carry trades slowed, and other data points put earlier economic releases into perspective. Headline inflation in the US declined to 2.9% year-over-year, which was lower than expected and the fourth consecutive decline. US GDP growth of 3% year-over-year for Q2 surprised to the upside, the forward-looking purchasing manager index for the US remains firmly in expansionary territory and US retail sales exceeded expectations. Investors reverted to the narrative of a soft landing, further supported by a very high likelihood that the Federal Reserve would finally cut rates in September, which led to a decline in US yields. Inflation in other developed markets also continued to trend downward. The Bank of England cut interest rates for the first time since 2020 by 25 bps in early August now that UK inflation has remained at its 2% target for two consecutive months (but has since risen to 2.2%). Headline CPI in the Eurozone decreased to 2.2% but increased to 2.8% in Japan.

Geopolitical and political events this month were notable but not market moving. They ranged from intensified fighting between Russia and Ukraine, the US presidential campaign in full swing, and third-party candidate Kennedy dropping out of the race and endorsing Donald Trump.

The US dollar weakened against all major developed currencies as easing expectations for the US accelerated. Listed real assets outperformed broader equities given interest rate sensitivity while commodity performance was flat, amid oil price declines of 5.6%.

Outlook

Over a few trading days at the start of August, a series of weaker than expected data readings on the US labour market and the US manufacturing sector led bond markets to begin pricing in a more aggressive rate cutting cycle by the Federal Reserve.

In addition, while expected by Mercer, the Bank of Japan surprised the markets with a rate hike, bringing their interest rate to 0.25%. Fear of a US recession, coupled with a global unwinding of popular trades, triggered substantial moves in global markets.

We believe these market movements were likely attributable to three main causes: a generalized fear of the US going into recession, the unwinding of overstretched positions such as overweight US tech, and the unwinding of short Japanese yen as a carry trade.

The sell-off appears to have been largely technically driven, especially given the large presence of leveraged investors in these markets, which has been further amplified in August, when liquidity is generally low.

The broad risk-off tone appears to have since subdued and the sell-off has cooled. This is consistent with our view that the sell-off had largely been driven by fast money and short-term repositioning, rather than an outright change in fundamentals.

Mercer’s Global Economics & Dynamic Asset Allocation team believes that fundamentally, not a lot has changed and the latest economic data from the US and elsewhere is consistent with cooling in a soft-landing fashion.

Notes