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MARKET TURMOIL: HOW WE'RE
Chief Investment Officer
Apr 24, 2023
Listen to David’s views here.
What follows is a transcription of the video:
The first quarter of 2023 was a tumultuous period in markets, with a fast start in January and then clear volatility in March after the collapse of Silicon Valley Bank (SVB). This led to fears of broader contagion across the banking system and the abrupt acquisition of Credit Suisse by UBS. The US Federal Reserve (the Fed) acted quickly to prevent broad contagion by stepping in to provide support for the bank and liquidity to markets in general.
In South Africa, the key story of 2023 so far has been the high level of loadshedding and its consequent drag on sentiment.
The Fed raised rates in both February and March in an attempt to cool high inflation. These moves were echoed by European central bankers. This took borrowing costs to their highest level since 2007. In general, recession fears receded through the first part of 2023, with increasing talk of a so-called soft landing. Central banks are attempting to cool inflation without causing a recession or a material increase in unemployment.
I’m reminded of a quote by former Fed chair Paul Volker, who said that one of the ways that monetary policy crushes inflation is by causing bankruptcies. History is not on their side in this regard, but we did see US inflation rise less than expected in March, leading to speculation that further interest rate hikes will be limited. The signal from the global bond markets is clearly pointing towards an economic slowdown in developed markets in the latter part of 2023 or early 2024.
While parts of the US economy remain remarkably strong, we see the SVB collapse as the first crack in a stretched system. Recall that it often takes more than a year for the impact of higher interest rates to be seen in economies, so we expect the pressure to build through the rest of 2023.
In terms of asset class performance, equities did best, with the MSCI World and S&P 500 indices rising 7.7% and 7.5% respectively over the quarter. The Eurostoxx was the star, helped by a weaker US dollar, up 16% in dollar terms. The MSCI Emerging Markets Index lagged global averages and returned only 4% over the quarter. From a style perspective, growth stocks performed best, delivering over 15% in the first quarter, while the value and momentum factors struggled on a relative basis.
Global bonds at least performed better than their disastrous 2022, delivering a 3% positive return in dollar terms.
Commodities were a mixed bag, with gold up almost 9% and oil declining each month. Overall, the commodity complex lost ground slightly over the quarter.
When looking at South Africa, our local equity market lagged its emerging market peers, up only 1% for the quarter in dollar terms. The numbers look a bit better when expressed in rands, with the JSE All Share Index (ALSI) up over 5% in the local currency. Within our market, industrials performed best, while resources lagged in line with lower commodity prices. Gold shares bucked this trend, however, rising 13% over the quarter. Our local bond market returned 3%, while cash delivered 2%.
Our houseview Equity model’s performance is particularly pleasing. Over the past 12 months, this portfolio returned 11% after fees, more than 6% ahead of its benchmark and over nine percentage points better than the median peer. The overweight positions in Prosus and AngloGold were key drivers of the outperformance.
This performance places the portfolio in the top 3% of the peer group over one year. The long-term performance here is also positive, with the portfolio delivering 11% per year for the last five years. Compared to peers, the portfolio is in the top quintile of its peer group over one, two, five and 10 years.
We are proud to share that during the quarter, the SPW Equity Fund, which is a near-identical replica of the Equity portfolio, was awarded a five-star rating from Morningstar. Morningstar is the leading independent fund researcher globally, which assesses both performance and investment process. Of the 224 equity funds in South Africa that they rate, only 12 have a five-star rating.
In line with the healthy performance of the SA equity portfolio, our Worldwide Equity portfolio also comfortably beat its benchmark after fees over the past year, delivering a total return of 11.7%.
If we move across to our Regulation 28 multi-asset portfolios, the performance here is again pleasing. The Balanced, Moderate Balanced and Conservative Balanced portfolios are all ahead of their benchmarks over one, two, five and 10 years after fees and in the top quartile of their respective peer groups over all these periods. The portfolios benefitted from both the SA equity component as well as positive asset allocation calls.
Over the quarter, we moved both our equity and multi-asset portfolio positioning to be more defensive, taking advantage of strong performance in shares like Prosus and AngloGold to create cash. In the multi-asset portfolios, we reinvested these proceeds into safe-haven US government bonds.
Overall, our positioning is now relatively conservative given our concerns over the impact that the material tightening in financial conditions over the past year is likely to have on future economic growth. Although inflation is clearly slowing from the multi-decade highs reached last year, it remains well above central bank target levels.
We maintain our view from the beginning of the year that May will see the final US interest rate hike of this cycle. Central banks lost some credibility in 2022 from their late reaction to rising inflation and we believe that they will work to rebuild this. So, while the market is already pricing in a number of interest rate cuts before the end of the year, we are less optimistic and expect rates to remain stable for most of the rest of the year after a hike in May.
When we look at global equities, prices are still higher than average on a forward-looking price/earnings multiple basis. On top of this, we are concerned about a seeming disconnect between consensus earnings estimates for the US market, which have only come down a few percent, and the way that various leading economic indicators are flashing red, essentially telling us that earnings estimates in the market are maybe a little bit higher than they should be.
The VIX, which is a gauge of volatility and effectively serves as an indication of the overall market’s level of fear, is at its lowest level since markets peaked in January 2022. This suggests to us that the US stock market is a little too complacent right now.
Turning our attention to South Africa, we have a materially different situation. Our market is looking cheap relative to both its own history and global peers. The spectre of loadshedding has dampened enthusiasm in our market with the various purchasing managers indices moving in the wrong direction.
While unfortunately a portion of the negativity is justified, we are starting to see one or two interesting opportunities in our home market where we think the market is pricing in too much negativity on certain shares. It is also worth reminding viewers that more than half of the profits generated by JSE-listed companies are generated outside South Africa.
After the solid start to 2023, as we look ahead to the rest of the year, we are fully aware that the future remains uncertain, but this is always the case. Asset prices around the world are within range of being reasonable at this time – a far cry from early 2022 when almost everything looked expensive. Our focus is on the progression of the economic cycle, which appears likely to deteriorate over the coming quarters, and hence the positioning within our client portfolios is relatively conservative.
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