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Portfolio Manager Monthly Insights
Hussein Sunderji, CFA
Vice President, Portfolio Manager
The Return of Market Volatility
Global markets experienced a bout of volatility from mid-July to early August, following a period of relative calm and optimism. This volatility seems to have been ignited by two factors (although others may also be at play):
1 – Incremental concern about the magnitude of investment versus near-term benefit for companies involved in various areas of the artificial intelligence (AI) infrastructure build. This came about following earnings announcements from some large technology companies.
2 – Weaker than expected US employment data for June, which sparked concern that the US economy was weakening faster than expected, and that the Federal Reserve may have waited too long to move away from its current monetary policy.
The latter dynamic drove a sharp drop in US bond yields and weakening of the US dollar. This caused another domino to fall, namely a strengthening of the Japanese Yen (JPY) and what appeared to be a partial unwinding of the popular JPY carry trade. This caused the Japanese Nikkei to fall 12% in a single trading session on August 5, the biggest single day decline since October 1987.
These events provide a stark reminder that volatility is inherently unpredictable and can arise when least expected. Often, the impact can be compounded by the fact that a period of prolonged complacency can result in excessive risk taking and crowded market positioning, which can unwind sharply.
How do the Ivy Funds Navigate Stormy Waters?
The Ivy funds are constructed by considering a long-term view of companies, markets, and economies, and our client value proposition - to carefully grow capital over time. The objective is to achieve superior returns on a through-cycle basis, while providing a smoother path to returns, thereby enabling clients to stay invested over the long term. This means that the funds are not aiming for the maximum return during all periods; rather, we and our clients expect that the funds are likely to underperform when markets are overly buoyant but aim to deliver strong relative performance during periods of turbulence. During the market selloff from mid-July to early August, each of the Ivy funds performed well on a relative basis and outperformed their benchmarks.
We do not position the funds based on our expectations for near-term market or macroeconomic movements, partly because we believe these are very difficult to predict with any level of recurring accuracy. It is also hard to predict exactly when a period of renewed volatility will set in. Rather, we build and position the portfolios based on a bottom-up analysis of our holdings and investment universe; if this analysis suggests that valuations for a particular sub-set of stocks are unattractive, or reflect overly optimistic assumptions, then we adjust accordingly.
Both the Ivy Foreign Equity and Ivy Global Balanced funds are currently defensively positioned. This is not because we believe a market correction (or worse) is imminent, or because we believe we are in store for a prolonged period of elevated volatility. The positioning is simply a product of our bottom-up analysis and the Ivy team’s long-standing client value proposition of carefully growing capital over time.
How are the Ivy Funds Exposed to Recent Drivers of Market Turbulence?
The Ivy funds’ exposure to areas that have attracted the most interest of late are:
- Technology and AI beneficiaries – the funds have exposure through stocks such as Alphabet, Microsoft, Oracle, Taiwan Semiconductor Manufacturing (TSMC), Amphenol, and others. The total exposure is below that of the MSCI World Index; furthermore, we believe these companies are well positioned and competitively advantaged on several fronts not just related to AI (all have been held in the funds for more than three years, long before recent optimism around AI set in). We regularly evaluate the portfolio weights of these stocks in the context of the long-term business opportunity versus valuation risk.
- Japanese stocks – the funds’ Japanese holdings come in the form of Terumo and Seven & I Holdings. Overall, the exposure to Japan is roughly inline with the MSCI World Index, and our exposure to companies that export from Japan (and are therefore more heavily impacted by swings in the JPY) is relegated to Terumo. We believe Japan is home to several high-quality multinational businesses, however valuations have not been particularly attractive, and corporate earnings (and stock market level) have been supported by a weak JPY.
Where to From Here?
We are often asked where we think markets are headed in the near term, and invariably respond ‘we don’t know’. While this may be frustrating to hear, it is an honest assessment of the difficulty of predicting market movements in the near term.
As a case in point, since the recent bout of market volatility, various economic datapoints have been released that suggest perhaps the economic situation in the US may not be as dire as the June employment report might have indicated. Markets have since rebounded sharply, US bond yields have moved up, and even the JPY carry trade seems to be attracting renewed interest. Just a few days prior, several economists publicly called for an emergency Federal Reserve meeting and aggressive rate cuts, and market strategists were calling for further downside from continued unwind of the JPY carry trade.
We certainly acknowledge the potential for future volatility, if for no other reason than what appears to be sustained crowding of markets around a few select companies and investment themes, as well as divergent monetary policy across countries.
An additional advantage of the Ivy team’s generally cautious approach is that it enables us to embrace volatility, using it as an opportunity to potentially own high-quality businesses whose share prices may have fallen. In Japan, for example, we would welcome renewed volatility if it results in a broader re-basing of currency and earnings expectations, along with more reasonable valuations.
In the meantime, we will patiently wait, and believe that the Ivy funds are positioned to not only withstand future potential turbulence, but also participate in further market appreciation in a relatively balanced manner.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
The contents of this document (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) are not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.
This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of August 16, 2024. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.