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16 Jan 2024

The Year in Review

After a very negative 2022 — when virtually all asset classes suffered in response to soaring inflation and rapidly rising interest rates — Foord’s investment team was not anticipating a bumper year last year. Portfolio manager Mike Townshend writes that the team started 2023 year climbing the proverbial ‘wall of worry’.

Despite the very negative market outcomes of 2022, fears of a US-led global recession topped our list of worries at the beginning of last year. We also expected corporate earnings to start to decline and the global consumer to come under increasing pressure due to higher interest rates and the cost-of-living crisis.

Meanwhile, the Russian/Ukrainian war ground on and — in the first damning signs of the toll of higher interest rates — a regional banking crisis developed in America. By the end of March, two US bank failures (Silicon Valley Bank and Signature Bank) and the collapse of Swiss banking icon Credit Suisse spooked markets before central banks intervened with unlimited liquidity lifelines.

Global interest rates continued to rise in 2023 as central banks struggled to bring inflation down towards target levels. Tight monetary policy eventually paid off as inflation rates declined steadily throughout the year. By year end, the US Federal Reserve had turned decidedly dovish, signalling that the next interest rate move would likely be down.

In the event, we have not yet seen a US recession despite the fastest pace of interest rate rises in 40 years. In fact, US growth accelerated even as growth in other markets — such as Germany — slowed or reversed. An analysis of all US economic recessions going back 70 years shows that rapidly rising interest rates almost always lead to recession — but often with a lag of almost two years, on average. Economic growth is also always fastest during the interest rate hiking cycle. This makes sense: interest rates are rising because the economy is overheating. We therefore remain concerned about prospects for a US slowdown in 2024.

The final quarter of the year started horrifyingly as Hamas gunmen launched a surprise assault on Israel from the Gaza Strip that led to fierce reprisals from the Israel Defence Forces. Fraught geopolitical tensions in the Middle East mean this conflict could still escalate into the wider region with possible implications for commodity and share markets. Oil prices were nevertheless lower for the year on cracks in the OPEC+ cartel and greater US output. Precious metals including gold rose on the prospects of lower rates and greater geopolitical stress.

ChatGPT and other Artificial Intelligence (AI) products took the world by storm in 2023. Investors flooded into stocks with any oblique exposure to AI themes. The tech-heavy Nasdaq Composite Index recovered from its 2022 pummelling to deliver an eye-popping 44.7%. Seven of the largest US tech stocks — dubbed the Magnificent Seven (see Did you Know?) — rose by an astonishing 111%, pulling American and global markets up with them. Incredibly, the Magnificent Seven now have a higher weighting in the MSCI World Index than all UK, Chinese, French and Japanese stocks combined.

Most asset classes comfortably beat inflation in the year and 2023 proved — unexpectedly for us — to be a year of exceptional returns on equity markets. The MSCI World Index returned 24.4% in US dollars with most regions delivering decent double-digit returns (North America 26.6%, Europe 20.7% and the Pacific region 15.6%). Emerging markets lagged with a return of 10.3%, but this performance was dragged down by China — which at -11.0% was the worst performing of the world’s bourses.

In South Africa, performance across all asset classes was broadly similar. Listed property at 10.1% did slightly better than bonds at 9.7% and equities at 9.3%. Cash was the laggard with a still decent 8.0% when inflation averaged 5.6%. Anaemic economic growth of just 1.0% (using latest numbers) constrained the performance of domestic companies. The FTSE/JSE All Share Index return of 1.4% in US dollars was lower than most global markets after the rand weakened by 7.2% against the US dollar over the year.

This tepid overall domestic equity performance masks significant variations between the different sectors. The financials and industrials sectors delivered decent rand returns of 21.5% and 16.6% respectively. However, the resources sector suffered an 11.9% decline as most commodity prices came under pressure. Gold proved its resilience in difficult geopolitical circumstances and returned a solid 13.1% in rand.

Against this backdrop, the Foord funds in South Africa performed credibly. The multi-asset class funds all delivered meaningful, inflation-beating returns. The low weighting to the underperforming resources sector, moderate bond exposure, preference for global assets and a healthy weighting to gold bullion aided this outcome. The Foord Equity Fund was nearly 5% ahead of its benchmark last year and is also showing outperformance for up to three years. The Foord fixed income suite was in-line or ahead of their benchmarks for the year.

The Foord global funds performed disappointingly last year amidst the market’s AI exuberance. The conservative Foord International Fund was cautiously positioned with a low weight to the expensive US markets and preference for quality Chinese consumer and tech shares trading on very attractive levels. Its hedges against US market declines cost the fund, while its Chinese stocks traded even lower. The managers did well to avoid the bond market rout and then add to its fixed income portfolio as the bond market recovered. In the event, the fund sustained a small negative return — a sobering outcome after the fund’s stellar 2022 outperformance. The Foord Global Equity Fund lagged world equity indices owing to its ~25% weight in ultra-cheap Chinese shares.

Looking ahead, we again enter a new year with caution and aware of potential downside risks. Geopolitical tension and high market valuations — especially in the US where bourses are just shy of all-time highs — remain a concern. Well-diversified investors, however, can still anticipate inflation-beating performances from their investments with Foord. Although equity returns should moderate off a high base, there is opportunity within different geographies, and certain sectors that underperformed in 2023 are now looking particularly cheap. Multi-asset class funds should also benefit from lower risk, inflation-beating returns now available in fixed income markets.

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