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07 Feb 2022

Markets in a nutshell - January 2022

January was a stark reminder to investors that risks abound. Developed market equities fell sharply and volatility spiked as investors reacted to hawkish signs from the US Federal Reserve portending an unexpectedly fast rise in interest rates to reign in surging inflation. US bourses led the declines given lofty valuations, with the long duration FANG Index falling most. Emerging markets outperformed owing to more moderate declines from Chinese equities and Brazilian shares posted double-digit gains in part on surging iron ore prices.

World bonds also sold off when yields rose materially on Fed Chairman Powell’s comments that retraction of policy stimulus would happen faster than previously signalled. The US 10-year bond yield surged 27bp, with US Treasury investors now pricing in five interest rate hikes for 2022 with some market participants estimating up to seven compared to the Fed’s previously signalled three hikes. Rising geopolitical tensions, tightness in energy markets, robust demand recovery and persistent global supply chain stresses all have inflationary consequences.

Oil surged again on robust demand, falling inventories and escalating Russia/Ukraine tensions. Iron ore also rallied by double digits, advancing on potential supply disruptions from Australian producers and robust Chinese demand. Precious metals gold and silver were softer on Fed hawkishness and the rising prospect of positive real interest rates at some point.

As is expected during falling markets, the Foord global funds performed near the top of their respective peer groups this month. The flagship Foord International Fund performed true to label, even delivering a positive return amid the selloff. The fund is cautiously positioned with extensive hedging of the expensive US S&P 500 Index. The Foord Global Equity Fund’s outperformance was driven by consumer discretionary, communication services and technology allocations.

The FTSE/JSE Capped All Share Index rose (more so in US dollars), pulled higher by financials and resources on stronger industrial commodities prices. Industrials lagged on weakness in the healthcare and media sectors with some non-resource rand hedges lagging on currency strength. SA shares detracted from SA fund returns, with core holdings in Aspen and Richemont lower on short-term headwinds. Investments in BHP Group, Sasol, Standard Bank and British American Tobacco were the fund’s top contributors.

The South African All Bond Index gained as the yield curve flattened on robust foreign and local buying, with holdings in the longer duration sectors contributing the most. South African government bonds continue to offer relatively attractive real yields and the core investment in the R186 medium-term bond added value in the multi-asset funds.

The rand strengthened on higher commodity export prices, sizable foreign buying of government bonds and some consolidation. Currency strength pared the good returns from the Foord global funds when converted into rands and the global component was the biggest detractor from fund returns in Foord’s SA multi-asset funds. We still hold the view that the currency suffers from structurally weak longer term fundamentals.

Market outcomes in January 2022 (and thus far in February) seem to vindicate our more cautious positioning. There may well be a path to an orderly management of inflation that does not result in more market turmoil, but the risks of a potentially bad outcome are high. Foord’s portfolios are actively managing the downside risks as per our safety-first approach.

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