MARKETS IN A NUTSHELL — FOR OCTOBER 2024

After robust gains in September, most equity sectors retraced in October as attention increasingly focused on the US elections. Share markets in Europe fell more on growth worries and euro weakness. Emerging markets were weakest, led down by Chinese bourses, which retraced after a massive spike in September.

Despite declining short rates, inflation and oil prices, bond yields rose — and bond markets fell — as investors increasingly fret about debt levels. In the risk-off environment, most commodities, including copper, traded lower. Oil prices edged higher and gold defied its typical inverse relationship with bond yields and a stronger dollar — reaching a new high by surpassing $2,800 an ounce.

In South Africa, the Medium-term Budget Policy Statement offered little reassurance regarding government debt worries. The debt-to-GDP ratio is set to exceed 75%, with low prospects for near-term improvement. The JSE was one of the better performing global markets in local currency. The bourse was only slightly down in rand, buoyed by platinum and gold mining shares. The All Bond Index tracked global bond markets lower, while the rand gave up some of its recent gains.

Against this backdrop of broad-based market weakness, and given their mandate-dependent China exposures, the Foord global funds all retraced in the month. Within the Foord International Fund, positions in the S&P 500 hedge instrument, the gold ETF and the precious metals streamer Wheaton Precious Metals helped to offset the declines.

The Foord SA funds also retraced modestly, with the weaker rand helping to pare the returns of global assets. The Foord Equity Fund underperformed its benchmark on its lower resources weight, but has still added 31% over the past year. The fixed-income suite benefited from its lower duration weight — the conservatively positioned Foord Flex Income Fund avoided the negative returns of some of its peers, while the Foord Bond Fund outperformed the falling All Bond Index.

At the time of writing, it seems as though the GOP has made a clean sweep in the US elections: the White House, the Senate and the House of Representatives. The party takes the reins at a time when the US economy appears resilient. Foreign investment in US stocks — which averaged around $30 billion annually in the 2010s — is projected to soar to $350 billion this year. This influx has pushed the US share of the global stock market to over 70%. 

However, while global investors remain bullish, US consumer sentiment is less optimistic. The growth in the US economy is uneven, driven primarily by the spending power of the wealthiest consumers and significant profit growth from a few large corporations. This lopsided expansion was heavily reliant on US government spending. 

It is understandable that US consumers demanded political change. Beneath the surface, many Americans are being priced out of the housing market due to affordability issues, and credit card debt is on the rise. Income inequality has reached unprecedented levels, and small businesses are experiencing confidence lows typically seen during recessions.

Historically high levels of US government debt add another layer of concern. The deficit has more than doubled to 6% of GDP over the past decade, with government debt increasing by $17 trillion — matching the total increase over the previous 240 years. This surge raises questions about sustainability, especially as global central banks appear to be shifting toward gold as a safe-haven asset over US Treasuries, signalling potential apprehension about US debt levels.

High government debt will limit the Trump administration’s fiscal flexibility, particularly as trade tensions, tariffs, and protectionism persist. There's also limited room for the Federal Reserve to cut rates further, with market expectations adjusting accordingly. The factors that have supported the relative strength of the US economy in recent years are waning.

On the other side of the world, China is implementing policies to address property market challenges and stimulate consumer demand. While it's too early to assess the full impact, these measures could pave the way for stronger growth in 2025. We continue to favour exposure to domestically oriented Chinese companies that are less affected by tariffs and which maintain healthy growth. 

So as developed economies continue to slow and with geopolitical tensions looming larger, investors need to remain cautious, but adaptable — especially in the face of newly resurgent inflationary pressures. Flexibility is going to be key. On the plus side, bond and equity markets have returned to their usual inverse correlation. This means that a diversified spread across asset classes, sectors, and regions may once again provide safety against any sharp falls in equity markets.