As we completed the first quarter for 2021, we saw many developments of significance for markets, some foreshadowed and some unexpected.
Earlier in 2021, markets had started to focus on inflation. We’ve seen an uptick in expectations for inflation, as much as we’ve seen the actual inflation numbers go up. Some of it is due to commodities and the base effect, which relates to the fact that prices dropped during the pandemic. This is clear in oil prices: West Texas Intermediate (WTI) spot prices in March 2020 traded below US$20 and have rallied to today’s price of US$60, which is close to, but still above where prices started in 2019 at US$50.
On top of that, we’ve seen increases in supply chain cost from logistics hiccups in the shipping industry. During the pandemic, fewer ships sailed to Asia to bring containers back on the trade route. As trade restarted, ports in Asia faced a shortage of containers, which were instead lying empty in American and European ports. That’s a logistics problem, and while inconvenient, it is solvable. However, in the interim it increases prices for transportation which feeds into margins or the end price for consumers.
This chart of the Containerized Freight Index shows that costs for exports from China have more than doubled over the past year, even if March has brought a small relief.
The blocking of the Suez Canal by the Ever Given was one the unexpected events that are impossible to foresee. The 400m long and 60m tall container ship ran aground in the narrow passage during a sandstorm. The passage enables cargo ships to avoid sailing around the tip of Africa to connect Asia to Europe. The Suez Canal is not the only route, but it saves three to four days and significant fuel. Any disruption introduces delays and increases the cost of transportation. The ship has been floated again and the Suez Canal is back in operation, but the event serves as a reminder how unforeseen events can create significant impact for the world economy.
What is the impact of these inflationary pressures?
Due to the higher inflation expectations, interest rates have started to rise. For now, this affects the longer end of the interest rate curve more than the short end. Meaning we see stronger interest rate increases for the 10-year term than the 3-year term. This chart illustrates the movements of interest rates for this year:
Yield to maturity for different Singapore government bonds on 31 Dec 2020 vs 31 Mar 2021
Change in Market Prices for different Singapore government bonds on 31 Dec 2020 vs 31 Mar 2021
The portfolio for AutoInvest consists of money market funds with an average maturity profile of less than 90 days and of short term interest rate funds with an average maturity of below 3 years, but currently closer to 1.5 years. The weightage between the fund categories is currently near 50%.
- Money Market funds are not impacted by this move in interest rates. Due to the very short maturity profile, these are not impacted by the rise in yields.
- Short term interest rate funds on the other hand have seen their performance reduced this month from their usual 2% to 5% range to less than 1%. The positive performance is testament to the conservative nature of the portfolios. The 10yr Singapore government bond actually lost almost 9% in value during the first quarter of the year.
The Autoinvest portfolio returned 0.06% in March and 0.24% in the first quarter of 2021, which equates to 1.05% on an annualised basis. The slightly higher level of interest rates will allow the portfolios to find more attractive investment opportunities and we are optimistic about the returns for the second quarter.
The content in this article is meant for informational purposes only and should not be relied upon as financial advice. Past performance is not necessarily indicative of future performance