May brought us economic data releases that helped us understand if the economic recovery is on track. The two important ones are Inflation and GDP growth.
But before we talk about the economic environment, a quick update on the monthly performance of the AutoInvest portfolio: May has seen stable returns of 0.14% which equates to 1.69% annually. This is a return to normality after the more turbulent month of April.
Let’s start with GDP
Economic growth has been strong in the first quarter which is positive for the fundamentals of the corporate sector and provides a positive backdrop for the portion of corporate bonds in the AutoInvest portfolio.
The Singapore economy expanded by 1.3% annually in the first quarter. Take note that this is compared to the first quarter in 2020 where the full impact of the pandemic was not clear and we had not seen any impact on the economic data. This remarkable recovery was accomplished in an unusual sprint and the chart below shows that quite clearly.
The keen observer will note that the quarterly growth numbers are slowing down and, if that trend continues, we won’t see growth continuing at above 3% in each quarter. The official guidance from the Ministry of Trade and Industry remains at 4% to 6% for the whole year.
The Singapore Consumer Price Inflation (CPI) is the second important economic data release and one that will keep us busy for the rest of the year. The latest release shows an annualized growth of 2.1%.
The cause of the rising trend in inflation is obvious: consumer prices are currently on the rise. There are many anecdotes that tell this story, from shipping prices to commodity prices, which are both input prices for most of what we consume. Rental prices, as measured by the “non-landed whole island” category, has broken it’s downward trend of last year and Q1 this year is higher than Q1 of last year – even if only by 0.5%.
Singapore Consumer Price Inflation (CPI), Year-on-Year data snapshots taken at quarter ends and April 2021; At the quarter ends where no bar is visible, inflation was reported at zero. (Source: SingStat)
Generally, higher inflation numbers bring higher interest rates. This could lead to lower prices for bonds, since prices and yields move in opposite directions.
Singapore’s bond market shows very strong correlation to the US bond market. With the U.S. Fed insisting that the current reading of inflation is “transitory”, it strongly believes that consumer prices will see less upward pressure by the end of the year. We’ll find out soon enough if this is really a temporary phenomenon and rates continue to stay low, or if inflation is more persistent, in which case interest rates are expected to go up.
The impact on AutoInvest
The two money market funds1 (approximately 53% of the AutoInvest portfolio), are less sensitive to the interest rate movements since they have very short maturity securities. These funds would benefit the fastest from the higher yields for their investment opportunities as reinvestment occurs faster. Higher rates would therefore be positive.
The two short-term interest rate funds2 (approximately 47% of the AutoInvest portfolio), are more sensitive to upward movements in interest rates. From our ongoing monitoring and reviews with our fund managers, we are aware that both funds currently have a much shorter average maturity than their upper limit restrictions.
Longer maturity bonds usually yield more than short maturity bonds but are also more sensitive to interest rate movements. The funds use upper limits on the average maturity to keep the risk in the fund low. By positioning the funds shorter than the upper maturity limit the fund managers are able to a) reduce the impact of potential interest rate rises due to lower sensitivity and b) enable themselves to reinvest into higher yielding bonds when a potential interest rate rise occurs.
1 The target allocation for AutoInvest is for 28% to the Fullerton SGD Cash fund and for 25% to the United SGD Money Market fund
2 The target allocation for AutoInvest is for 15% to the Fullerton Short Term Interest Rate fund and for 32% to the United SGD fund
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