Global equities ended the 3 quarter on a negative note.

Chinese equities continued the downward momentum that started in February. On top of the ongoing concerns over regulatory tightening, reforms and the health of Huarong, worries over the ability of Evergrande to service its debt became a focal point of the Chinese capital markets in the 3rd Quarter. The bailout, or euphemistically, restructuring of Huarong provided some relief to the market, but this was soon overshadowed by the concerns over Evergrande. Evergrande is the 2nd largest developer in China and has outstanding debts of over USD300 billion. As access to credit quickly dried up for Evergrande, the authorities acted quick to ring-fence the risks and limiting the fallout of the beleaguered developer. Despite the selloff we saw in both the bond and equity markets, the growing consensus in the market is that further contagion from this episode can be avoided.

In the US, the FED prepared the financial markets for tapering. This was done against the backdrop of rising inflation fuelled by pandemic related supply chain constrains and rising energy prices. Low prices and the demonization of hydrocarbon has resulted in underinvestment in traditional sources of energy. A post pandemic recovery, coupled with extreme weather patterns, increased demand to the point that shortages emerged in coal and natural gas. Natural gas has exploded as countries scrambled to fill storage tanks ahead of the winter months, and crude oil broke $80 mark for the first time the pandemic started.. These inflationary trends pushed the 10 year Benchmark yield from the low of 1.18 to 1.56%. These factors combined, rattled the US market, breaking its positive momentum.

These recent events have created a heighten level of volatility and uncertainty in the market. The portfolio is not immune to the volatility in the market, but the quality of the businesses and their management in the portfolio will ensure that prices reflect their earning power of the underlying companies once the dust settles. The pullback has also allowed the fund to deploy more cash and re-position the portfolio.

30 Sep 2021