MARKETS IN A NUTSHELL — FOR MAY 2024

Investors continued to chase rainbows in May, powering world stock markets to a 4.1% gain. In the US, the leading stock indices again made new highs. The ‘Fantastic Four’ — Nvidia, Apple, Microsoft and Alphabet — accounted for more than half of the S&P 500 return. Despite the bullishness, recent US data suggests some economic weakness. Growth was slower as consumers eased up on spending, while job creation fell.

Meanwhile, European manufacturing data suggested improving economic activity and Chinese data surprised — boosting Chinese bourses. Conversely, yen weakness weighed on Japanese consumer sentiment, causing Japanese stocks to lag developed world peers.

Global bonds advanced on the expectation of interest rate cuts later this year. However, there is now some regional divergence in central bank policy: amongst developed markets, Sweden’s Riksbank and the Swiss National Bank moved first to cut rates. Even some emerging markets have made cuts, including Brazil, Colombia, Mexico, Hungary and the Czech Republic.

In Europe, slowing inflation allowed the ECB to cut rates in June. In contrast, high services inflation in the UK makes an early BoE rate cut unlikely. The latest US inflation data showed only modest slowing in headline and core categories. Accordingly, the US Federal Reserve is likely to keep rates unchanged until inflation falls below 3% — or the economy falters. The Bank of Japan faces a unique challenge: interest rate increases needed to support spiralling yen weakness could tip the economy back into unwanted deflation.

Gold continued its ascent — now up 13% for the year — driven by Chinese central bank buying. The metal is also a natural beneficiary of some countries diversifying away from dollar reserves, after Russia’s foreign currency reserves were frozen when it invaded Ukraine. Oil retreated from its April peaks, while the broader commodity complex gained on solid global demand and ongoing war in the Middle East.

In South Africa, early market optimism for improved governance that followed the ANC’s spectacular electoral losses quickly faded as investors began digesting the mostly likely coalition scenarios. The JSE lagged global bourses, once more missing out on the global risk-on sentiment. The rand and the SA bond market also nervously retreated from intra-month gains.

The Foord Global Equity Fund was a standout performer in the month — rising 5.2% on broad-based gains in its underlying investments, led by materials and Asian names. The Foord International Fund also gained, despite its judicious hedge against US market weakness weighing on fund returns.

Foord’s South African multi-asset funds performed well in relative and absolute terms. They benefitted from the resilience of the offshore portfolios and the managers’ preference for global, rand-hedge counters over SA Inc. shares. The Foord Equity Fund again outperformed its benchmark and most SA-only peer group funds. These funds and Foord’s fixed-interest fund suite are all judiciously positioned against the risk of an adverse political outcome, as coalition talks progress.

Looking ahead, divergent — and uncertain — monetary policy will remain a source of volatility for equity and bond markets. The reset in yields since 2022 means that bonds again play a dual role in portfolios: providing inflation-beating yields and diversification against growth shocks. We have cautiously increased fixed income weights within the Foord multi-asset portfolios this year.

With recession fears diminished, equity investors are increasingly taking risks they usually would not. In a recent Bloomberg Markets Live Pulse Survey, a fifth of respondents listed the Magnificent Seven tech stocks as their preferred US safe-haven asset — even though just 17 months ago these very same shares lost over 40% in a single year. Any departure from the positive narrative baked into US equity prices could be a very nasty surprise for investors. We continue to proactively position portfolios to protect investor capital against such a selloff, as well as against the corrosive effect of persistently sticky inflation.