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08 Apr 2024

MARKETS IN A NUTSHELL — FOR MARCH 2024

World equity markets remained in go-go mode last month, with US bourses hurtling along at a giddy pace. The S&P 500 Index added another 3.1%, wrapping up the first quarter with a hefty double-digit gain and closing at yet another all-time high. Notably, the March rally was not driven by ‘big tech’ — energy, materials and utilities were the biggest gainers. World developed market bourses rose in tandem, while emerging markets also gained as even reluctant investors joined the fray. Chinese equities nudged higher, with the market seemingly now to have troughed.

US bond investors were once again the party poopers. Treasury yields rose (and bond prices fell) as investors revised expectations for how much and how fast the US Federal Reserve will cut interest rates this year. The market has now whittled down the six rate cuts it was pricing in at the start of the year to less than three. Market expectations are therefore now more aligned to the Fed’s guidance. The US yield curve remains inverted — with longer dated bonds yielding less than shorter dated bonds — indicating that bond investors are still bracing for a US recession.

While bond markets are more bearish, US equity investors seem confident that a recession is totally off the cards — the S&P 500 Index (even excluding the expensive IT and communication service sectors) is trading at close to 20 times trailing earnings. By historic standards, the index is trading at very expensive levels. There is significant risk of loss if the expected 'no landing' scenario collides with a different reality. 

Commodities rose across the board, with everything — from copper to cocoa — surging higher. Brent crude oil has crept up 14% already in 2024, touching $90 a barrel and raising the spectre of a rebound in inflation. Gold bullion was a standout performer in March — surging 9% to hit new all-time highs. A host of drivers helped to push the metal up, including elevated geopolitical tensions in the Middle East and strong buying by central banks, particularly in China.

In South Africa, the FTSE/JSE Capped All Share Index tracked global markets higher. The bourse rose nearly 5% when measured in US dollars on rand strength during the month. Resources shares finally gained a bid after a year of declines — rising by double-digit percentage points in March. SA bonds were lower after yields rose 50 basis points in the month.

With their lower weight to big tech counters and better diversification to the better-performing sectors — including materials names — the Foord global funds posted good returns in March. The materials exposure in Foord’s global funds is diversified across industrial commodities companies, agricultural commodities players, and energy firms. They comprise companies whose earnings and cash flows are not only less cyclical than traditional materials peers, but also offer more certainty.

The South African multi-asset funds were buoyed by the good gains in the Foord global funds, as well as by key investments in resources counters, Aspen, Naspers/Prosus — and, of course, gold. The Foord Equity Fund gained but lagged its resource-heavy benchmark in the month. The Foord Bond Fund understandably traded lower but outperformed the All Bond Index in the falling bond market. The income funds continue to perform to expectation and preserved capital in an environment of negative bond returns.

We continue to believe that global inflation will prove stickier than market participants and central bankers first thought. While two months doesn’t make a trend, we have now seen two consecutive months of US inflation data that has been higher than expected. Foord’s multi-asset funds continue to hold a myriad of investments designed to hedge the global inflation risk, while also performing satisfactorily should inflation not return toward target levels. Examples include lower risk materials names, gold bullion — which also hedges volatility and geopolitical risk — and interest-bearing investments, notably inflation-protected bonds.

The Foord International Fund has also seen a marked increase in fixed income investments, from near zero at the beginning of the 2022 rate hike cycle. Having little exposure to bonds during a period of rapidly rising rates protected investors against significant losses in this asset class. Today, however, interest rates are sufficiently attractive to justify a meaningful and growing allocation — benefiting from far higher yields and very low risk of loss from these levels.

Our funds remain well-diversified across sectors and several economic factors. Our global funds are equally well-diversified across regions. In fact, they are more regionally diversified than many traditional global products — remembering that the US now makes up more than 70% of the MSCI World Index. Of note are our funds’ exposures to the Asia Pacific region and China. These equities, both collectively and individually, are offering exceptional value.

While it’s never fun to miss out on a party, the solid performance across all Foord funds in March is a good reminder that returns can be found outside of crowded spaces. We remain concerned that those on the US party bus may not be able to hop off without risking life or limb. Our cautious view, coupled with elevated valuations, leads us to believe that our patience will be rewarded with the ability to buy US equities at lower prices, at lower valuations and with a lot less risk. As stewards of our investors’ capital, we remain focused on getting our investors safely to their destination — that of meaningful, inflation-beating returns over time.

Insights

13 Jun 2024

Are Inflation-Linked Bonds an Under-Appreciated Asset Class?

Investment professional Linda Eedes talks to portfolio managers, Farzana Bayat and Rashaad Tayob about the role of inflation-linked bonds in South Africa’s current economic environment.

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13 Jun 2024

Are Inflation-Linked Bonds an Under-Appreciated Asset Class?

Investment professional Linda Eedes talks to portfolio managers, Farzana Bayat and Rashaad Tayob about the role of inflation-linked bonds in South Africa’s current economic environment.

Watch now
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