Markets in a nutshell — March 2022
Developed market equities posted their first monthly gain this year. Hopes of a Russia/Ukraine war ceasefire provided some lift to market sentiment after a decidedly tetchy start to the year. Persistent US and global inflation and the US Federal Reserve forecasting up to eight interest rate increases for 2022 remain headwinds. Emerging markets lagged after Russian equities were removed from most global indices at a zero value and Chinese bourses struggled on further zero-COVID policy lockdowns.
Developed market bond yields rose markedly on expectations that rising global inflation may not be as transitory as first believed. The Fed raised rates by 0.25%, initiating the long-anticipated rising rates cycle. It also indicated that the termination of its bond buying program and additional rate increases will happen quicker than previously guided. The US 10-year government bonds sold off as markets eventually started to price in higher inflation and the more hawkish Fed language started to take effect.
The zero allocation to foreign bonds protected investor capital as the asset class delivered negative returns. However, the managers in the Foord International Fund latterly took a small yield-enhancing position in two-year US Treasuries as the gap between cash rates and the short end of the bond curve continued to widen.
Industrial and soft commodities increased on supply concerns following Russia’s invasion of Ukraine. In addition to Russia being a major exporter of fossil fuels, Russia and Ukraine combined account for one-third of global wheat production. Rising global food inflation now seems almost certain in the coming months, adding fuel to the fire of the managers’ base case for inflation expectations rising further than is currently factored in. Precious metals gold and silver rose amid the increased volatility and rising geopolitical uncertainty, living up to their billing as important diversifiers and alternative stores of value.
The US dollar strengthened against all major currencies. The greenback benefited from the Fed’s hawkish tilt and its safe-haven status as a global reserve currency. The rand posted further gains against the dollar on foreign inflows as a relative emerging market haven from the Russia/Ukraine war-related risks. Improved terms of trade given SA’s buoyant commodity exports also provided short-term support to the currency, but the unit is vulnerable longer term given the economy’s lack of global competitiveness.
In South Africa, the FTSE/JSE Capped All Share Index was flat as resources and industrials fell on rand strength and financials bucked the trend with the major banks reporting better than expected results. Foord Equity Fund outperformed on the underweight position in resources companies, an overweight allocation to select SA Inc. mid-caps and core holdings in FirstRand and Standard Bank. This was partially offset by investment in global media companies Naspers and Prosus on further weakness in key Chinese tech asset Tencent and a stronger rand while investments in global brewer Anheuser Busch InBev and luxury goods company Richemont also detracted.
The All Bond Index gained. Longer duration bonds contributed the most while yields in the 3-7-year maturity sector ticked up on rising near-term inflation expectations. SA listed property was the leading asset class, but UK portfolio mainstay Capital & Counties retraced on rand strength.
The managers anticipate further volatility in the months ahead as central banks walk the tightrope between reigning in rising inflation expectations without pushing economies into recession. The second-round global inflationary consequences of the war between Russia and Ukraine has made this tightrope tighter.
The funds have been well positioned for this environment, given our long-held views on the (arguably) unintended market consequences of a decade-old bout of unprecedented monetary and fiscal stimulus. Foord’s “safety first” mantra is serving investors well through this period of elevated risk.