Q3 2021 INVESTMENT REVIEW - Market Street Trust Company
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Q3 2021 INVESTMENT REVIEW
Market Review and Outlook
by Robert J. White, CFA, CFP®
The quarter ended in disappointment; the tech-laden remainder of 2021, the comparisons are up against the
Nasdaq declined 6% from mid-September highs to end 33.1% annualized gain in GDP during Q3 of 2020.
Markets take a breather in the the quarter flat while the broad market S&P 500 Index Obviously, the U.S. was not going to keep growing at
eked out a 0.6% return, although off 4% from its best such an unsustainable rate! Depending on how large the
third quarter but the S&P 500 still levels. Similarly, international developed markets ended successful spending bills, forecasts for 2022 GDP growth
down 0.5% while emerging market equities lost 8.1% are in the 3-5% range, meaning the U.S. economy would
remains up 16% for the year! during the third quarter. Unfortunately, fixed income still be generating significantly above-trend growth that
allocations were no help with most bonds providing flat is supportive for equity valuations.
to slightly negative returns. But who can really complain Inflation remains a growing concern for investors,
when the Nasdaq and S&P remain up 12% and 16% year although it is not usually a harbinger of poor equity
to date, respectively? Investors have been spooked by a returns. While inflation indirectly increases the discount
growing number of headline risks that temper outlooks rate used in equity valuation models (resulting in lower
and give rise to concerns about the sustainability of the stock prices), inflation also drives corporate profits
18-month equity rally. While we acknowledge these higher and increases nominal consumer net worth.
known risks, we continue to believe that investors Indeed, rising wages, rocketing consumer net worth,
should favor equities, even though that means accepting substantial excess savings, and strong corporate pricing
greater short-term volatility. power, all point to the likelihood that corporate
Here at home, there are a myriad of political and profitability and earnings will continue to surprise to the
economic issues to concern investors. At the political upside.
level, we have the never-ending discussions on raising All eyes will be on the Federal Reserve (Fed) during the
the debt ceiling—an uniquely American tool that serves fourth quarter as it is expected to begin its long-
little real purpose; according to the Federal Reserve it anticipated tapering—a reduction in quantitative easing
has been raised or revised 78 times since 1960. While it through the slowing of its bond purchases. While
is inconceivable that U.S. politicians would allow the investors may also have been anticipating further
nation to default on its debt, the issue continues to stir indications of a 2022 rate rise, the sudden resignation of
dramatic headlines. Politicians are also grappling with a the more hawkish Dallas and Boston Federal Reserve
potential $1 trillion infrastructure bill as well as a presidents has increased the likelihood that the first-rate
massive $3.5 trillion social spending plan. The successful rise will be pushed to 2023. The employment picture in
passage of either of these bills would provide a long- the U.S. remains unclear, with the current 5.2% flattered
term tailwind to economic growth and employment. by a material decline in the workforce participation rate;
Economically, the U.S. is suffering from some difficult inflationary concerns are likely to be overshadowed by
comparisons. During the first half of the year, it was easy the Fed’s mandate to achieve full employment.
to post impressive growth relative to the depths of the The reduction in the labor force participation rate
Q1/Q2 COVID-induced recession of 2020, the briefest suggests issues in the labor market supply chain.
recession in U.S. history. However, as we go through the
Continued next page ...
2 Market Street Trust Company Investment ReviewMarket Review and Outlook
by Robert J. White, CFA, CFP®
Likewise, supply chains around the world remain under India, and Japan; and the formation of a new Indo- humanitarian and economic ways. In the U.S., the
pressure from the massive increase in demand for Pacific security alliance involving Australia and the U.K. average 7-day daily deaths are higher than the initial
goods over the past year coupled with labor shortages Both meetings serve to counter China’s aggressive peak in April 2020, approaching the worst days of last
and production curtailments due to COVID. The impact maneuvering around disputed territories in the South winter. Global daily deaths have been stuck in a range
is felt everywhere from the lack of computer chips for China Seas. Economically, China has investors of 8,000-12,000 for most of this year, a humanitarian
car production to the shortages of crab and lobster in concerned about a property market bubble as well as crisis but far short of the number of people who die
New England. The energy markets provide a volatile the level of corporate indebtedness—recent headlines from malnutrition every day—a situation that itself is
example of supply/demand imbalances with the price around the potential default of Evergrande prompted being exacerbated by COVID-induced food inflation.
of coal, natural gas, and uranium all soaring (see equity market volatility around the globe. Lastly, Despite this gloom, almost 30 million vaccinations are
Commodities page). In the U.K., the situation has been Chinese regulators have been cracking down on some being administered every day, a rate that could suggest
exacerbated by its withdrawal from the European mega-rich companies, prompting concerns about some sort of global normalcy within the next six
Union and its supply of immigrant labor – a shortage of corporate earnings growth going forward. While these months.
truck drivers has resulted in gas rationing and the are all issues to be cognizant of, investors must So how do we feel with these issues laid out and many
possibility of the British Army delivering fuel to gas remember that China remains a command economy at more we could have mentioned? We continue to
stations. And across the world, tankers queue up to heart—the Government has greater latitude to deal believe that the extraordinary amount of fiscal and
enter overcrowded ports while shipping containers with these issues in ways that Western governments monetary stimulus has created economic growth
accumulate on land. Supply chain issues do take time to would not. As an emerging market, China has always conditions that are not quite yet in the final innings. As
work through, but we expect the negative impact on been riskier for equity investors, and this remains the global economies continue to exit COVID restrictions,
economic growth this year to be reversed next year as case; risk and opportunity tend to go hand in hand. we still expect that equities will provide the best
supply chains slowly normalize. However, the role of investors is to determine whether returns. Despite this, we have discussed some of the
While struggling with its own economic issues, China the current opportunity is worth the risk or if capital is known clouds on the horizon and increased volatility
remains in the crosshairs of U.S. investors and better deployed elsewhere (see ‘Common Prosperity or could come from these or any still unknown issues that
politicians. Geopolitical risks are certainly increasing, Common Misery’ page). arise over the coming months. As always, we are ready
with the U.S. engaging in two alliances in recent weeks: Of course, while we are learning to live with COVID, its to adjust portfolio allocations accordingly as new
the Quadrilateral Security Dialogue with Australia, impact is still be felt around the world in both information comes to light.
Index 3Q21 YTD 1-Year 3-Year 5-Year 10-year
S&P 500 0.6 15.9 30.0 16.0 16.9 16.6
Russell 2000 (Small Cap) -4.4 12.4 47.6 10.5 13.4 14.6
MSCI EAFE (Int’l) -0.3 8.8 26.4 8.2 9.4 8.7
MSCI Emerging Markets -8.0 -1.2 18.5 8.9 9.6 6.5
Barclays Municipal Index -0.3 0.8 2.6 5.1 3.3 3.9
Barclays Muni High Yield 0.4 6.5 11.3 7.4 6.0 6.7
Note: Returns are in %; returns greater than 1 year are annualized. Source: Bloomberg
3 Market Street Trust Company Investment ReviewU.S. Equities
Highlights by James Talalas
U.S. stocks had a tumultuous third quarter as Fed • Regardless of Fed insistence to the contrary, worry of higher interest rates, a boon for bank profit margins.
tapering worries and the rapid Delta variant spread prolonged inflation was a key driver of market Other cyclical sectors such as Industrials, down 4.2%,
struck fear into investors. The S&P 500 was the only volatility in the third quarter—even the Dollar Tree and Materials, down 3.5%, were two of the weakest
major index with a positive return, up 0.6% and passing was forced to abandon its $1 price structure given performers as market volatility drove investors
4,500 for the first-time mid quarter before foundering rising prices. U.S. CPI levels remained above 5% for toward more defensive investments, such as
amidst a rocky September. the fourth straight quarter (see chart below), leading Healthcare and Utilities, which were up 1.4% and
• A third wave of COVID cases ravaged the U.S. investors to question the transitory nature of 1.8%, respectively.
throughout the quarter, as the Delta variant dealt a inflation and the validity of the Fed’s previous • Small-cap growth stocks far underperformed their
heavy blow to the U.S.’s reopening efforts despite statement that they would not start raising rates large-cap counterparts in the third quarter. The less
having widely available vaccines. In yet another until 2023. If this bout with inflation were to persist, cyclical large-cap growth stocks returned 1.2% versus
attempt to combat the lasting economic effects of the Fed could be forced to raise rates early, curbing small-cap growth’s 5.7% decline. Large-cap indices
the virus, President Biden urged congress to pass his inflation but leading to inevitable weakness in stocks. are generally comprised of stocks in less cyclical
next trillion-dollar stimulus bill, this time focused on • Financials were the top performing sector this sectors than small-cap indices, offering more
rebuilding key infrastructure in order to create more quarter, returning 2.7%. Despite being a cyclical protection as market volatility heightens, but less
jobs and help bridge the unemployment gap left in sector, which generally underperforms with volatility, upside potential once conditions return to normalcy.
COVID’s wake. financial stocks rallied on the hopes of potentially
12-Month Percentage Change, CPI Sector Returns QTD vs. YTD
Return (%)
Source: U.S. Bureau of Labor Statistics Source: Bloomberg
4 Market Street Trust Company Investment ReviewInternational Equities
Highlights by James Talalas
International Stocks Roiled by Supply Chain Woes: • Germany was one of the worst performers among quarter in the form of a new prime minister, Fumio
International markets were mixed in the third quarter, developed markets, down 4.0% as their renewable Kishida, who promises to increase fiscal stimulus, as
declining 3.0% as developed nations struggled with a reliant society struggled with spiking electricity prices well as a central bank more than willing to continue
global supply shortage while also contending with a across Europe and semiconductor supply chain issues with ultra-dovish monetary policy while other
third wave of COVID. severely crippled their automotive industry. The UK countries begin their taper.
• The U.K. market was down 0.6% in the third quarter, and Germany are in a challenging predicament going • Given the current supply crisis being faced by all of
suffering from a third wave of COVID cases and into the winter, as their commitment to reduce Europe, Energy stocks were the top performer in the
massive supply chain issues effecting a multitude of fracking leaves them reliant on a dwindling energy third quarter, up 7.0% as prices surged due to
industries. The Bank of England has warned that supply that is being hoarded by producers such as diminishing supply and increasing demand. The
inflation is likely to spike given current supply chain Russia. Consumer Discretionary and Communications
constraints, potentially remaining above 4% into the • Japan was one of the quarter’s strongest performers, sectors, which are both being hit hard by the lack of
second half of 2022. Although potential inflation is returning 3.2% while most other developed market semiconductors and other key resources, were the
troublesome and supply chain issues are likely to indices were negative. Japan was able to weakest performers, unable to keep up with the
hamper economic recovery in the short run, the meaningfully ramp up its vaccine distribution, with massive demand and returning -11.4% and -9.6%,
central bank believes inflation is transitory and has nearly 60% of the population now fully vaccinated, a respectively.
elected to leave rates at 0.1% and continue their far cry from the mere 14% fully vaccinated in June.
current stimulus programs. Japan has some tailwinds going into the fourth
Sector Returns QTD vs. YTD Country Returns QTD vs. YTD
Return (%)
Return (%)
Source: Bloomberg Source: Bloomberg
5 Market Street Trust Company Investment ReviewEmerging Market Equities
Highlights by James Talalas
Emerging Markets Sobered by Chinese Crackdown: The • India was up 12.6% in the third quarter, having finally supporters to protest the country’s governmental
MSCI Emerging Markets Index was down 8.1% in the fixed their vaccine supply chain issues. The world’s institutions he believed did not support him.
third quarter as increasing regulation in China shocked second most populous country has delivered over Argentina’s prospects improved as its government
markets worldwide while the Delta variant restricted 500 million vaccines since June, quickly making up for rapidly increased its vaccine rollout with second
emerging market economies. lost ground; 47% of its population has had at least COVID dose to nearly being administered to an
• Chinese stocks were up a meager 0.6%, having been one dose, up from 20% at the end of the last quarter. additional 40% of its population.
whipsawed by major regulatory changes and India has managed to quell the spread of the Delta • Emerging market growth stocks sharply declined in
Evergrande’s property crisis. Xi Jinping’s grandiose variant but still faces headwinds as the nation must the third quarter, down 10.9% versus their value
regulatory display of cracking down on many of combat massive unemployment and prop up an counterparts, down 5.1%. The success of larger,
China’s largest companies, including Tencent and economy that continues to be beleaguered by growthier stocks is inextricably tied to the obfuscated
Alibaba, has shown his intent to curb the capitalist COVID. future of the Chinese stock market. Emerging
tendencies of China’s current market. The resulting • Brazil and Argentina, continuously two of the most markets were pummeled across nearly all sectors,
liquidity crisis of Evergrande sent a chilling message volatile countries amongst emerging markets, posted with only the highly defensive Utilities sector and
to markets worldwide as China’s second largest drastically different returns this quarter, with demand shock driven Energy sector posting strong
property retailer was forced to sell assets to cover its Argentina up 20.3% while Brazil declined 19.7%. returns, up 7.8% and 9.4%, respectively.
massive debt payments without aid from its Brazil continues to suffer from the tempestuous
government. behavior of President Bolsonaro, who invoked his
Emerging Market Sector Returns QTD vs. YTD Emerging Market Country Returns QTD vs. YTD
Return (%)
Return (%)
Note: MSCI EMI = MSCI Emerging Markets Index; Source: Bloomberg Source: Bloomberg
6 Market Street Trust Company Investment ReviewFixed Income
Highlights by Ross Miller, CFA
“I’ll take ‘Tapering and Higher Yields’ for $1,000 Alex.” • The municipal bond market saw its streak of positive issue selection are key in a rising rate environment as
After much speculation, the Federal Reserve finally quarterly performance stall as yields rose and prices certain credits could suffer a greater pullback in price.
indicated that conditions have improved to possibly fell accordingly. Municipal bond yields typically lag • High-yield corporate bonds ended the third quarter
begin tapering its massive quantitative easing program Treasury yield moves so it is likely municipal bond positively despite the rising rate environment. A
in 2021. This signaling led to a large reversal in the yields have room to move higher still. Nevertheless, Federal Reserve (Fed) tapering can be viewed as
downward yield trend sending bond yields higher across the municipal market remains in a strong positive by high-yield investors as it infers that the
the higher quality fixed income markets. fundamental position with tailwinds of high demand economy is strong enough for the Fed to remove
and weaker than expected issuance. Municipal yields accommodations. Recent history is on the side of the
• The Treasury yields rose in the third quarter following have been trading well below historical averages for high-yield market as the index returned 7.5% during
Federal Reserve indications that it may be willing to some time so a rise in yields would offer some more
begin tapering as early as this fall. However, most of 2013 when the taper tantrum (significant rise in
attractive buying opportunities. yields) occurred. However, yield levels are much
the rise occurred during September with 10-year
Treasury yields rising 0.21% to 1.52%; for most of the • High-yield municipal bonds continue to outperform in lower today than in 2013 and high-yield corporates
third quarter concerns over weaker growth and labor the fixed income market with a 0.38% Q3 return. remain unattractive compared to other fixed income
market data had driven yields lower. While the yield While high-yield municipals are less rate-sensitive assets given the embedded risk and the potential for
moves have been significant, we are a long way from than investment grade municipals, they were not higher rates ahead.
taper tantrum-like increases. immune to the September rise in yields. Caution and
Higher Municipal Yields: Not a Bad Thing Fixed Income Index Returns %
Fixed Income Index 2012 Yield 2013 Yield 2013 Return 2020 Yield Aug 2021 Yield
U.S. Treasury Bonds 0.86 1.44 -2.75 0.57 0.86
Municipal Bonds 2.17 3.15 -2.55 1.07 0.95
US Agg 1.74 2.48 -2.02 1.12 1.42
High Yield Muni's 5.66 6.76 -5.51 3.82 2.93
U.S. High Yield 6.13 5.64 7.44 4.18 3.87
Source: Bloomberg
Source: Bloomberg
7 Market Street Trust Company Investment ReviewU.S. Economy
Highlights by Ross Miller, CFA
“Cracks in the economy but not your house!“ jobs. Add in initial and continuing jobless claims that likely slow consumer consumption (67% of the
• U.S. economy remains on strong fundamental have increased slightly and the U.S. economy will economy) and slow growth overall. Add in the risk of
footing, but supply chain issues are putting cracks in remain stuck due to labor supply/demand tax increases along with data showing major city
the optimistic growth story. While supplier delivery mismatches. The U.S. economy needs the labor rents increasing, then consumers could see a
delays and inventories are improving, they remain far market slack to dissipate before it can really fire on all significant impact of price inflation weighing on their
away from historical levels. Supply chain and cylinders. pocketbooks.
production issues remain a cog in the strength of the • The biggest headwinds to the economic growth story • One area of the economy that remains on solid
economic recovery and will be a headwind to growth are inflation and potential tax increases. Inflation has ground is the housing market. While the pace of sales
and a tailwind to inflation until they are resolved. been buoyed higher by demand exceeding supply has recently slowed, pricing remains strong signaling
• The labor market is providing another wrinkle in the while being exacerbated by supply chain issues. The strength in housing demand. Similar to new iPhone
economic growth story. The labor market has most recent producer price index (or input cost cycles, increased demand and limited supply lead to
improved notably in 2021 but significant issues inflation) rose to 8.3% year-over-year (YoY) even as significant increases in pricing and sales. However, as
remain; the Job Openings and Labor Turnover Survey core consumer price inflation moderated to 4% YoY. the market normalizes, those that have been pushed
(JOLTS) has job openings at 10.9 million and the If input cost inflation does not start to fall, it is likely out of the housing market should step in, helping to
number of unemployed at 8.4 million, reflecting that those higher costs will eventually be passed on keep sales and prices firm.
potential structural issues leading to so many unfilled to the consumer. Higher prices to consumers will
Cost vs Consumer Inflation Gap Widening Structural Issues Leading to Labor Market Slack?
Millions
Percent
Source: Bloomberg Source: Bloomberg
8 Market Street Trust Company Investment ReviewInternational Economy
Highlights by Ross Miller, CFA
“The recovery is slowly moderating.“ economy, has seen its exports rebound from the • Emerging markets are also recovering, posting solid
depths of the pandemic and remains only slightly second quarter GDP data. Higher commodity prices
• The European economy continues to recover but the above its 5-year trend line. Given its reliance on and higher real rates continue to make emerging
recent fuel crunch in the U.K. and concerns over exports, any slowing of global trade could be a risk to markets attractive, although a stronger U.S. dollar will
undersupplied natural gas ahead of the winter are the speed of the European recovery. On a positive offset some of commodity market’s strength. Emerging
risks. The most recent GDP data shows the European note, the ECB expects supply chain issues to dissipate markets’ export focus is beneficial but significant
recovery is on its way with the major European by early next year. supply chain disruptions will be a headwind to their
economies returning to growth in the second quarter growth outlook. Moreover, China is a large trading
• China, the first economy to recover from COVID-
and the European Union on track for 5.0% GDP growth partner for the Southeast Asian region and a slower
in 2021, moderating to 4.6% in 2022 (European Central induced recession is now the first major economy to
see its growth rate slow. China has had issues with rate of growth in China can hinder regional emerging
Bank (ECB), September 2021). market growth. Outcomes in emerging markets are
inflationary pressures weighing on the consumption of
• While European economic data has remained positive, likely to be mixed as countries navigate supply chain
goods while its zero-COVID policy is also hurting
it has started to slow following the lead of the U.S. and production; entire cities can be shut down when cases issues, COVID cases, a stronger dollar, and slowing
China. Purchasing Manager Index surveys remain are identified. Not only does this impact its economy export demand from major developed market
expansionary but have pulled back from their late but it also impacts the global supply chain given economies.
spring peaks. Germany, which is an export dependent China’s status as a manufacturing hub.
German Export Value Chart Chinese Trade Slowing
Export Value (Billions, Euros)
Percentage
Source: Bloomberg Source: Bloomberg
9 Market Street Trust Company Investment ReviewCommodities
Highlights by Robert J. White, CFA, CFP®
While precious and industrial metals weakened, the $74.98, up 2.1% in Q3. Oil prices are now up 54.5% lost 7% year to date while the price of an ounce of
energy complex rallied on fears that a natural gas crisis since the start of the year – a far cry from the sub- silver is down to $22.05 from $26.46 at the start of
in Europe presages shortages around the world. $20 prices of April 2020. The U.S. Energy Information the 2021.
• The sharp post-COVID recovery in global economic Administration expects oil prices to be sustained at • U.S. real estate continued to gain during the recent
growth has massively increased energy demand at a current levels through the remainder of this year. quarter. Among U.S. REITs, residential remains the
time when supply remains constrained. In Europe, Despite the move to renewables, the global energy strongest market with a 7% Q3 gain bringing year to
national gas prices have spiked over 1000% to €97 shortage has given renewed life to coal; coal prices date gains to 36%. Retail REITs have powered ahead
per megawatt hour – pre-COVID, the price had rallied 85.6% in Q3 and are now up 214% year to this year but saw some of the weakest growth this
hovered around €20 for the past decade. As Europe date. quarter. Globally, REITs in the Middle East and Africa
and Asia seek supplies, exports of LNG from the U.S. • Precious metals had a weak third quarter, continuing performed best in Q3, up 5.1%, while Asian REITs
have increased. Natural gas prices in the U.S. have this year’s softening trend. Palladium prices declined declined 5.2%.
also surged, rising from pre-COVID range of $2-3 per 31.6% during the quarter and are off 22.5% year to
million British thermal units (Btu) to around $5 per date. Palladium is a key component of catalytic
million Btu. converters and demand has been hit by the global
• While oil prices dipped mid-quarter they reached shortage of computer chips that has forced auto
new highs for the year in September, ending at companies to cut production. Elsewhere, gold has
European Natural Gas Prices Commodity Returns QTD
Monthly Price (Euros) per megawatt hour
Percent
Source: Bloomberg Source: Bloomberg
10 Market Street Trust Company Investment ReviewSpecial Topic: Common Prosperity or Common Misery?
Caution ahead! Investing in China Has Become a Lot More Uncertain by Michael R. Eisner, CFA
Xi Jinping, President of the People’s Republic of China standards of living that brought hundreds of millions of capitalism that was unleashed during Deng-Xiaping’s
and General Secretary of the Communist Party, has Chinese out of poverty slows or even declines. For reign. Given the Chinese government’s large role in its
been pushing a policy of “Common Prosperity,” which investors, it is a conundrum. China’s economy has a economy, that means changing rules for companies
emphasizes a more equal distribution of wealth. This history of high growth rates, and its GDP is slated to midstream to more culturally fit Xi’s vision. This also
has led to a slew of changes that has made China not pass that of the U.S. by the end of this decade. includes intimidation of business leaders who are
only a much more aggressive geopolitical player, but Companies like Alibaba, Tencent, Baidu, and other fast - forced to strictly adhere to the party line or see their
one where the rules of investing in Chinese markets are growers have made both Chinese and foreign investors companies taken from them or worse, be sent off to
no longer clear. This has resulted in several high-profile very wealthy. But it has also brought about tremendous jail.
takedowns of certain sectors of the economy (private income inequality within China, whose Gini index (a
The Chinese government can manipulate its economy
education) as well as some high-profile stocks (Didi summary measure of income inequality) at
because it subsidizes markets through state-controlled
Global, Ant Group), where investors have seen billions approximately 47, is at the high end globally.
banks. And for many years, this unbridled growth of
evaporate overnight through government regulatory
To implement Xi’s idea of Common Prosperity, which is debt through these banks has led to a rapid expansion
changes.
much more closely aligned with Mao Zedong’s vision of of standards of living and high growth in areas such as
The question is whether Common Prosperity slows a socialistic society, China’s regulators and Communist housing, retail, media, and manufacturing. But this has
China’s growth down so much that the increase in Party are tightening the reins on the Western-style also led to a rapid buildup of debt (China has one of the
Continued next page ...
Regional Comparison of Income Inequality Levels Regional Comparison of Income Inequality Trends
Net Gini Index; in Gini points, year of 2015 (or last available); average across the region) Net Gini Index; in Gini points, change since 1990; average across the region)
Source: GMO: China and Emerging Markets Ex-China, Warren Chiang, Binu George, September 23, 2021, page 8. SWIID Version 5.1; IMF, Source: GMO: China and Emerging Markets Ex-China, Warren Chiang, Binu George, September 23, 2021, page 8. SWIID Version 5.1;
and IMF staff calculations. NOTE: ASEAN = Association of Southeast Asian Nations; LIC = low-income counrty; NIE = newly-industrialized and IMF staff calculations. NOTE: ASEAN = Association of Southeast Asian Nations; LIC = low-income country; NIE = newly-
economy; OECD = Organization for Economic Cooperation and Development. industrialized economy; OECD = Organization for Economic Cooperation and Development.
11 Market Street Trust Company Investment ReviewSpecial Topic: Common Prosperity or Common Misery?
Continued
highest debt to GDP ratios of any country in the world), Currently, China’s focus, driven by Xi’s vision of
much of it backed by worthless assets (Niall Ferguson, a Common Prosperity, will most likely lead to a slower
historian and writer for Bloomberg recently wrote that growth rate than the previous few decades. It will also
20% - 25% of all of China’s housing stock is estimated to lead to changes in rules and returns for investors.
be empty). The recent Evergrande debacle, a leverage Given that, it will be prudent to be judicious with
real estate company on the verge of default, is allocations of capital to the Chinese markets and for the
symptomatic of this situation. time being, it may be more rewarding to focus
elsewhere.
The Chinese government’s control of its economy
means though that it most likely can preclude a
disastrous black swan event. That is why we don’t
believe Evergrande or changes in the investing
environment will produce a “Lehman” moment, one
that takes the entire economy down with it. But it gives
us pause to rethink whether returns from investing in
China may ultimately be attractive. We believe an
active approach is much more prudent, focusing on
favored (by the government) segments of the economy.
The changes in China also put more of a spotlight on
the stocks of other Asian countries, but, again, with so
many of these countries tied to China’s growth, a focus
on country and stock selection will be key.
We don’t want to completely halt our consideration of
investing in emerging markets, many of which have
similar issues to China (repressive governments,
corruption, environmental issues, etc.). Emerging
markets are still where much higher growth is likely to
occur, and these populations’ basic needs are still
plentiful. We invest through active managers who not
only incorporate a top-down country view but who also
use fundamental company analysis in favored higher
growth areas (like the emerging consumer).
12 Market Street Trust Company Investment ReviewTactical Asset Allocation
Market Street Growth Strategy Third Quarter 2021
ASSET CLASS NEGATIVE NEUTRAL POSITIVE
CASH Portfolios maintain a general underweight to high quality investment grade fixed income and
a small overweight to cash; as volatility increased during the latter part of the third quarter,
INVESTMENT GRADE BONDS higher allocations to cash helped offset some of that volatility in risk assets. Municipal bonds
remain expensive although as yields have moved higher, the assets have become more
Municipal Bonds intriguing. We remain patient for a better entry point.
HIGH YIELD DEBT We retain an underweight exposure to municipal high yield debt as lower yields make us
cautious about further upside. Prospects of higher taxes along with higher yields for less risk
High Yield Municipal Bonds have only increased demand for high yield municipals tax-exempt yields. We maintain tactical
High Yield Corporate Bonds allocations to dollar-denominated emerging market sovereign debt and closed-end funds and
will leverage a higher cash exposure to tactically reallocate when more attractive entry points
Emerging Market Debt occur.
HEDGED ASSETS Hedge fund allocations are in flux as we move to the new strategic asset allocations. For now,
we are maintaining neutral to overweight allocations as we believe that hedged strategies
Long/Short Equity make sense given their diversifying and less correlated attributes. We continue to refocus
hedge fund exposures towards unique alpha-generating opportunities that can provide
Distressed/Structured Credit attractive risk-adjusted returns.
EQUITIES
U.S. Equities - Large Cap Portfolios maintain a full U.S. equity exposure as we believe there is further upside to the
current rally, despite higher volatility. We maintain overweight exposure to smaller
U.S. Equities - Small Cap capitalization equities which are primely positioned to benefit from economic growth and
stronger earnings. We maintain a neutral allocation to international equities while favoring
Developed Market Equities
emerging markets over developed markets within the asset class. Market Street’s private
Emerging Market Equities equity program provides attractive exposures that cannot be obtained in the public markets.
Private Equity
REAL ASSETS
We believe MLPs continue to offer the potential of very appealing total returns, although
MLPs strong returns this year have reduced their attractiveness. Despite the excitement around
green energy, the transportation of hydrocarbons from wellhead to end consumer will be
Global Real Estate/REITs critical for years to come. We remain more neutral to negative both global REITs and natural
resources, preferring to put money to work in plain vanilla U.S. equities.
Natural Resources/Energy
13 Market Street Trust Company Investment ReviewINVESTMENT TEAM: This presentation has been prepared by Market Street Trust Company. The additional fluctuation in the value of any investment. Each investor must assess
views expressed herein represent opinions of Market Street and are presented the suitability of an investment, one’s tolerance for risk and the impact on one’s
for informational purposes only. They are not intended to be a recommendation diversification strategy. This presentation does not constitute an invitation to
Michael R. Eisner, CFA or investment advice and do not take into account the individual financial buy or an offer to sell securities, or any other products or services.
Senior Vice President circumstances or objectives of the investor who receives it.
This is intended as general information only. Investors in these funds may be
Chief Investment Officer
Certain statements included in this presentation constitute forward looking required to meet certain criteria under the securities laws in order to qualify.
statements. Forward looking statements are not facts but reflect current Any discussion of U.S. tax matters is not intended and cannot be used or relied
Robert J. White, CFA, CFP® thinking regarding future events or results. These forward statements are upon for the purpose of avoiding U.S. tax-related penalties.
Director of Investments subject to risks that may result in actual results being materially different from
Please visit our website for additional information on the funds and any
current expectations.
investment fund updates. As always, please feel free to contact us if you would
Ross Miller, CFA Past performance (before and after taxes) does not guarantee future like to learn more about our investment program.
Portfolio Manager performance. There is no assurance that Market Street Trust Company funds
will achieve their investment objectives, or that they will or are likely to achieve
results comparable to those shown herein, or will make any profit, or will be
James Talalas able to avoid incurring losses. Exposure to foreign currencies may cause
Investment Analyst
MARKET STREET TRUST COMPANY:
Main Office:
2 International Drive, Suite 301
Portsmouth, NH 03801
800.962.6876 phone
www.marketstreettrust.com
14 Market Street Trust Company Investment ReviewYou can also read
