Markets In A Nutshell — For August 2024

August started poorly for global equity markets. In the US, disappointing manufacturing data, weaker new jobs numbers and the unemployment rate rising to 4.3% sparked fears of a recession. Meanwhile, the Bank of Japan’s decision to raise rates by 25 basis points caused a swift unwinding of yen carry trades. The yen’s rapid appreciation triggered the biggest selloff in Japanese stocks since Black Monday in 1987. Wall Street followed as nervous investors took profits, leading to broader selloffs across global markets.

However, sentiment shifted mid-month when US Federal Reserve Chair Jerome Powell hinted at imminent rate cuts during the Jackson Hole Symposium. Powell’s comments, which signalled a shift in focus from fighting inflation to supporting the labour market, sparked a rally. As a result, the S&P 500 Index gained 2.3% in August, while other developed equity markets advanced 2.7%. Emerging market stocks — including those in South Africa — were also positive, while the dollar weakened against the other major currencies.

Developed and emerging market bonds also benefited from the expectation of imminent rate cuts, with the FTSE World Government Bond Index gaining 2.3%. Commodities, however, faced headwinds. Oil prices fell on weaker demand, and iron ore hit a two-year low amid China’s real estate troubles. The Bloomberg Commodity Index remained flat.

Gold remained a standout, hitting near-record highs as expectations of a weaker dollar and lower yields pushed prices up. The value of a standard gold bar exceeded $1 million for the first time, reaffirming gold's role as a financial safe haven.

All the Foord funds added positive returns in the month. The Foord Equity Fund in South Africa performed near the top of its peer group, adding 3.4% in the month and taking its one-year return to 21.4%, compared to its benchmark return of 16.2%. The Foord International Fund also produced a standout performance, as out-of-favour stocks recovered in the month. The Foord Global Equity Fund was positive, but lagged peers, given muted Chinese stock market gains. This weighed on the returns of the Foord multi-asset funds in South Africa, given rand strength.

Despite lingering concerns over US growth and inflation, investors are still hoping for a soft economic landing by the Fed. The S&P 500’s price-to-peak earnings ratio is over 25 — 49% above its historical median — with expectations of a 26% earnings increase by the end of 2025. If earnings fall short, a painful market revaluation could follow.

As we approach the end of a period marked by high interest rates and an overemphasis on mega-cap US tech stocks, we expect to see broader allocations to risk assets and emerging markets poised to outperform. Foord’s portfolios remain diversified geographically and by economic sector. Quality stocks and defensives with modest valuations remain appealing in a slowing growth environment. High-quality fixed income offers attractive yields and strengthens portfolio resilience against market uncertainty.

Recent market volatility — including a large fall in the S&P 500 at the time of writing — highlights the disconnection between market movements and economic fundamentals. This creates opportunities for disciplined investors willing to exploit mispricing.

The ongoing volatility is a stark reminder that we’re still grappling with the unintended consequences of more than a decade of easy money. The market is warning investors that the system remains fragile, and areas of vulnerability are likely to continue to be exposed — particularly where valuations are stretched. Investors should proceed with caution.