Markets In A Nutshell — For April 2024

Developed world equity and bond markets slumped in April on a combination of hot inflation data and slowing economic growth in the world’s biggest economy. The US has now recorded three consecutive months of hotter-than-expected inflation readings. Market participants are alive to the fact that the US Federal Reserve won’t be easing rates as fast or as much as previously expected. Markets are today pricing in just one Fed rate cut in all of 2024 — dramatically lower than the six to seven cuts expected at the start of the year.

Investor nervousness rippled across world markets. Developed market equities fell 3.7%, led lower by US indices, with the US S&P 500 Index falling more than 4%. Bond markets also fell, after 10-year Treasury yields rose 50 basis points to 4.7%. Other interest-rate sensitive asset classes were sharply down as well — global listed-property indices fell by close to 6%.

Japanese equities surrendered some of their recent gains, too. Japan remains the only developed economy not yet to have increased interest rates in this cycle. Interest differentials are exerting downward pressure on the yen, which plumbed 34-year lows against the US dollar in April. The Bank of Japan had to intervene aggressively to prop up the currency on concerns that imported inflation would weaken nascent domestic demand.

Commodities ended the month as the top-performing asset class. Broad-based demand and the danger of escalation of hostilities in the Middle East boosted commodity prices across the complex. The copper price rose by double digits, while gold hit another all-time high — fuelled by festering geopolitical tensions and some central banks stepping up purchases of bullion.

Meanwhile, reemergent interest in attractively priced Chinese equities propelled the MSCI China Index to a 6.5% gain. Commodity-exporting economies did well in the rising commodity price environment. As a result, the MSCI Emerging Markets Index posted a small gain in the month.

The FTSE/JSE Capped All Share Index advanced close to 3%. Resources led the index for the second consecutive month — buoyed by BHP’s buyout offer for Anglo American, which surged by 32.6%. Index heavyweights Naspers/Prosus gained around 7%, after Tencent rallied in Hong Kong. South African bonds delivered a small, positive return and the rand gained slightly against the US dollar.

The Foord global funds performed well in relative and absolute terms in this environment. The Foord International Fund returned 1.3%, as the US S&P 500 hedge positions gained in the falling market and as Chinese stocks recovered. The Foord Global Equity Fund also benefitted from advancing Chinese equities, clawing back nearly 3% alpha in the month.

In South Africa, the Foord multi-asset funds performed in the top decile of their respective peer groups in April. The Foord Equity Fund continues to outperform the FTSE/JSE Capped All Share Index over rolling one and three-year periods. The Foord Income and Flex Income Funds have safely delivered inflation-beating returns over the year. The Foord Bond Fund outperformed its All Bond Index benchmark, while being conservatively positioned.

Looking ahead, US markets appear to be adjusting to our view that US rates would need to stay higher for longer. With US consumer prices up 3.5% in the 12 months to end March — and trending higher — inflation is still too high for the Fed to consider cutting interest rates imminently without nasty repercussions. This reignites the prospect of a US recession — and the need for hasty rate cuts in future.

Whatever the reason, investors had the jitters in April — and as investors oscillate between optimism and pessimism, the US equity market remains unusually precarious. The cyclically adjusted price-earnings ratio — known as the CAPE or PE/10 ratio — is currently in the 97th percentile of all historical readings for the S&P 500 Index. US shares have rarely been more expensive than they are today: the risk of permanent capital destruction is high.

In constructing portfolios, we consider scenarios that include recession and deflation, as well as the prospect of persistent inflation. Our objective is to ensure that portfolios are constructed to generate meaningful inflation-beating returns, while protecting them against the types of market events that set investors back for years.

As forward-thinking investors, we continue to use our top-down process to allocate capital away from areas of risk and towards areas of opportunity. With US 10-year yields now edging close to 5%, prospective returns for bonds have not been this good since 2007. Within the asset class, we prefer inflation-linked bonds that offer attractive real yields and protection against the threat of higher inflation. We continue to add to this asset class.

Our bottom-up stock-picking process favours businesses with resilient business models and secular growth prospects. For tactical reasons, we maintain a material hedge against the risk of a pullback in US indices. We also maintain sizable gold and cash weightings to weather adverse market and geopolitical outcomes in the medium term.