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06 Feb 2024

Markets In A Nutshell — For January 2024

January marked the beginning of a new year, but it did not herald a change in stock market momentum. US equity markets continued to defy gravity and the US S&P 500 Index again made new highs. Meanwhile, the Hang Seng Index in Hong Kong slumped further towards levels last seen 20 years ago.

In contrast to the ‘almost everything rally’ that characterised the last quarter of 2023, performance across asset classes in January was more of a mixed bag. The broad S&P 500 Index advanced 1.6% to set a record closing high, boosted by surprisingly robust economic growth data. This included yet another resilient jobs report alongside firmer wage growth and unemployment remaining steady at 3.7%. Later in the month, the US fourth-quarter GDP print of 3.3% (annualised) was significantly above economists’ expectations.

The data added credence to market hopes for a ‘soft landing’ for the US economy, after the fastest rate hiking cycle in 40 years. The US Federal Reserve grasped the opportunity to push out its timeline for pre-emptive rate cuts. This was negative for the fixed income market, which scaled back the number of rate cuts priced in for 2024 and pushed out expectations for the start of monetary easing from March to May. US Treasury yields rose — reversing some of last year’s gains — and the bond market fell.

Looking more broadly, the MSCI World Equity Index — which tracks 23 developed market countries — rose 2.2% in US dollars. This was driven mostly by the US, which makes up almost 70% of the index. The Japanese stock market also contributed, with the TOPIX up 7.8% in January — aided by continued depreciation of the yen against the dollar.

The biggest US tech stocks once again propelled the January US share rally, despite the sector’s latest quarterly numbers not yet reflecting the anticipated explosion in AI-driven revenues at Microsoft, Amazon and Google. However, a renewed focus on operational efficiency and capital returns managed to sustain investors’ tech stock attention into 2024.  

The Magnificent Seven are fast becoming the Magnificent Six, with Tesla starkly underperforming the rest of the gang. Shares in the electric vehicle manufacturer plummeted 24.6% in January, after Tesla reported slower revenue growth and shrinking gross margins for the fourth quarter of 2023. EV sales have continued to rise to record levels globally, but at slower rates than expected. At the same time, competition is heating up. In January, Chinese rival BYD overtook Tesla as the world’s top-selling EV manufacturer.

The world’s second largest economy reported official fourth-quarter GDP growth of 5.2% (annualised) — a rate most developed markets can only dream of — and announced new stimulus by the People’s Bank of China. However, international investors remain highly sceptical about investing in China. In January, Western investors extended the strongest and longest selling streak since the Stock Connect trading link between Hong Kong and the mainland opened in 2014. Chinese equities slumped, dragging down the MSCI Emerging Markets Index.

In South Africa, the FTSE/JSE All Share Index tracked global emerging markets lower — more so in US dollars after the rand retraced its recent gains. All sectors were lower — other than listed property, which produced a positive return. Resources counters were again the worst performers on the local bourse as precious metals including gold and platinum — as well as copper — traded lower. South African bonds were little changed, with the All Bond Index yielding a small but positive return. Oil was higher in the month.

The Foord global funds were again on the wrong side of the global momentum trade. The value theme pervades Foord’s whole suite of products — the lower-than-average weight in expensive US tech shares and higher weight to leading Chinese tech and consumer shares, detracted heavily. In the conservative Foord International Fund, judicious reintroduction of hedges against US market retracement were negative at the margin only. The fund’s defensive ‘bond proxy’ investments — such as those into utilities — detracted as bond yields moved higher. The gold bullion ETFs, as well as the investments in precious metals streamer Wheaton Precious Metals and copper miner Freeport-McMoRan, were negative.

The South African multi-asset funds were understandably marginally negative, with only rand weakness and fixed income assets offering respite from the equity market weakness. The Foord Equity Fund again avoided the worst of the market drawdowns with its astutely low weighting to the resources sector and preference for rand-hedge counters that were buoyed by currency weakness. The Foord fixed income suite performed largely in line with benchmarks in the month.

We continue to receive questions from investors regarding the wisdom underpinning our Chinese investments. The prevailing Western narrative is that China’s political economic model is running out of steam: the state is suppressing entrepreneurs and stifling innovation, and financial implosion hovers on the horizon. Yet, despite its socialist characteristics of state coordination and resource allocation, innovation and entrepreneurship have in fact been defining features of the Chinese economy this century.

Market incentives have clearly worked to incentivise Chinese entrepreneurs to create some of the world’s most successful companies. However, state planning and mobilisation have also been a key part of its success. For example, China has rapidly — in a matter of a few years — become the largest consumer as well as producer of electric vehicles. How has this happened so quickly? Mass adoption of a new-generation transport technology requires rapidly rolling out charging stations and reorganising supply chains. Without the state’s assistance, such rapid growth would have been impossible.

China is not only the global leader in EV production, but it also has the world’s most extensive EV charging infrastructure. Beijing has overseen the installation of about 2.3 million EV chargers throughout the country — compared to a paltry 130,000 stations in the US. In this way the Chinese government is actively driving the most rapid pace of technological advancement in the world.

The current wave of negative sentiment presents investors with a generational opportunity to buy some of the world’s leading companies at extraordinarily attractive prices. Our Singapore investment team understands these markets and companies well and has identified several of these opportunities for Foord’s global portfolios. For now, notwithstanding their attractive fundamentals, sentiment has worked against these positions.

The pessimism around China stands in stark contrast to the incredulous optimism baked into the high valuations for similar businesses in the US. In that market, the prevailing Goldilocks narrative depends on many things going right and nothing going wrong. The assumption is that the US economy will be neither too hot nor too cold. The market expects the Federal Reserve to begin cutting interest rates meaningfully in 2024, without the backdrop of a recession or other crisis.

To continue the Goldilocks analogy: the US market is priced for everything to be ‘just right’. What we’ve learned through more than 40 years of managing money is that it serves our investors better if we continuously ask ourselves what could go wrong, and to build portfolios that can withstand a wide range of potential outcomes.

One of the few things within our control as investors is the price we pay for the future earnings streams of the businesses we buy. When earnings expectations are high, prices are high. When unrealistic expectations and reality eventually collide — as they must — prices fall. Investor capital can be permanently lost.

While many investors may be counting on ‘happily ever after’ following the US market surge, we prefer to keep ourselves alert for opportunities, but mindful of risks. After all, unsuspecting Goldilocks was eventually woken from her peaceful slumber by a frightening bear. Let’s hope the same fate doesn’t befall unwary investors this year.

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