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16 Jan 2024

Delivering Safe Investment Returns In 2024

Despite the risks associated with expensive global share markets, the investment landscape still offers investors prospects for decent returns in 2024. Investment professional Linda Eedes writes that the global opportunity set has broadened over the past year — with better return prospects now available across a wider array of asset classes. In this article, she outlines several key areas of opportunity in the Foord multi-asset portfolios.

First off, South African government bonds maturing in ten years are now trading at yields above 11% — levels unseen for two decades. These investments offer attractive real (above inflation) returns and a margin of safety even if yields rise further owing to rising inflation expectations (bond prices fall when yields rise). While the country’s debt metrics and risk premiums have both deteriorated, the risk of default in rand-denominated bonds over this time horizon is low. Investing in attractively priced bonds acts as a stabilising force and ensures a steady and reliable income.

Foord remains invested in asset classes that provide protection against resurgent inflation, but also offer good opportunities for upside growth. This means we still have a relatively high weight to selective equities, since owning shares in companies with pricing power remains the best way to hedge against structurally high inflation.

The South African share market — with a price-to-earnings ratio of around 10-times earnings — is significantly undervalued compared to many global markets and its own history. This offers an asymmetric opportunity to capitalise on higher returns, since the prevailing low prices — already pricing in bad news — protect against downside risk from a variety of sources. If we see a global recession, SA shares should fall less than global peers.

Chinese stocks held in our global portfolios have weighed on performance recently but should become a tailwind in the years ahead. Our Chinese investments are expected to grow significantly faster than the average US company over the next three years — with the differential in growth rates close to 20%. Despite historical underperformance, the significant valuation gap and better growth rates in Chinese companies suggest a strong recovery. We are prepared to remain patient in the expectation of stellar returns from these solid, cash-generative businesses.

Gold — a timeless safe-haven asset — offers investors a hedge against volatility, US dollar underperformance, and geopolitical and systemic risks. Recently, prospects for a regional escalation of the Israel-Hamas war have reaffirmed gold's role as a reliable diversifier. Its steady performance and store of value during challenging times make it a meaningful addition to any well-diversified portfolio, especially if we head into a global recession.

Finally, cash is no longer trash. Cash protects investor capital and provides liquidity for market opportunities. With substantial interest rate increases in most economies over the past two years, holding cash no longer means incurring high opportunity costs through foregone returns elsewhere. Current cash rates yield a decent income and allow flexibility to seize opportunities thrown up by market volatility.

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Quarterly Conversations Q4 2003 I Foord International Fund

Multiple-counsellor portfolio manager on the Foord International Fund, Brian Arcese talks to investment professional, Lind Eedes about the fund’s performance in 2023 and how it is positioned going forward.

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