China's stock market woes triggered a sharp fall fund returns in October, with several nursing double digit losses, according to the latest Morningstar data.
Overall, market volatility has continued but returns overall were better. About half of the 795 funds in our dataset had a positive month, unlike September, where only 61 of our 787 covered funds returned above 0%.
Energy funds continued their winning streak but as inflation remains a key driver for most markets, the top performers in October were a mixture of US, European and Latin American funds.
As Ben Yearsley, director of Shore Financial Planning, says: “Inflation numbers don’t make for pretty reading.” In the UK, ONS data has showed inflation hitting 10.1% in September, and Eurozone inflation hit 10.7%, with the ECB adding 0.75% to official rates last week.
In the US, the Federal Reserve on Wednesday lifted the federal funds rate by 0.75 percentage points in the fourth consecutive meeting with a rate hike of this size. With this move, US interest rates rise to a range of 3.75%-4%, up from zero at the start of the year. The Bank of England is due to meet today and a rate rise similar to the US is expected.
Top Performing Funds in October
Surprising no one, BlackRock's World Energy was again the top fund last month – the fund is up almost 70% this year. In October alone, the fund returned exactly 15% as oil prices ticked upwards after a more stagnant third quarter for crude prices. The strategy’s October return was also significantly higher than the second-best performer, Robeco BP US Premium Equities, which gained 9.35% over the month.
The rest of the top table is mixed, featuring US equity funds of all sizes, as well as Europe ex-UK and Latin America. The list also holds four funds with a Morningstar Analyst Rating of Bronze or Silver. Dimensional US Small Companies was the highest-rated fund with the best return in October, with 9.11%.
Bottom Performing Funds in October
At the other end of the table, the laggards were all focused on China, with two exceptions: Schroder ISF Hong Kong Equity and UBS Asian High Yield.
UBS EF China Opportunities was the worst performer with a -20.99% return, but the fund was no outlier as the rest of the table all have returns below the negative 15% mark. The majority of the 50 worst-performing funds have either a China or an Asia focus, meaning their exposure to Chinese equities is high. Of these, 30 funds suffered double-digit losses.
The highest-rated fund, Schroder ISF China Opportunities, suffered a 16.93% loss, and the fund is now down 29.24% this year. However, among these 10 funds, it’s JPM Greater China that has the biggest loss year-to-date, at 37.31%.
And it’s no surprise. China’s stock market has been plummeting in reaction to last month’s Communist Party congress and the political reshuffle where President Xi Jinping keeps a hold on his power and is joined by more of his own allies. Markets are expecting a hard-line approach to the zero-Covid programme, more opaque future government policies, and greater uncertainty and risk.
As Perth Tolle, the founder of Life + Liberty Indexes and creator of the Freedom 100 Emerging Markets ETF (FRDM), told my colleague Lauren Solberg this week, this is an increase in “autocracy risk” – risk resulting from government power concentrated in the hands of the few. And investors are starting to recognise the signs.
“First, it was the market’s reaction to Russia’s invasion of Ukraine earlier this year. We’re seeing autocracy risks play out again in the latest market action surrounding China,” she says.
Autocracy risk can — in addition to limiting human freedom — stifle growth, prolong market downtyrns, and trigger capital flight. In China, trade restrictions and zero-Covid policies that shut down some of the country’s largest factories are other examples of autocracy risk.
