MARKETS IN A NUTSHELL - JUNE 2022
It is worthwhile at the half-year point to put context to the events of 2022, with global markets unequivocally into bear market territory. Markets took fright early in the year at higher and more persistent inflation and as central banks began to withdraw stimulus. As is typical of liquidity driven market shocks, most asset classes sold off and there was little diversification benefit available from the typical 60/40 investment strategy. Commodities were the outlier, still benefiting from 2021’s global supply backlogs. They were given their own booster shot by Russia’s invasion of Ukraine and the subsequent squeeze in energy and agricultural soft commodities.
But growing economic recessionary fears are more latterly moving markets, as inflation prints remain stubbornly high and central banks turn increasingly hawkish. Equity markets sold off further in June, with US and European bourses crossing bear market thresholds with drawdowns exceeding 20%. However, US bond yields have started to fall and commodity prices have started to reverse quite sharply — reflecting growing fears of a global economic slowdown.
Pleasingly, the Foord funds have performed excellently as our baseline thesis of a significant, albeit uncomfortable, multi-decade inflection point continues to unfurl. We have been anticipating this bear-market environment for some time. All of Foord’s multi-asset investment strategies including the Foord Flexible, Foord Balanced, Foord Conservative, Nedgroup Stable and Foord International Funds are near the top of their respective peer groups for the six-month period as markets have trended down.
The protection strategy on the expensive US market has added value all year. But performance was given additional tailwinds from the reversal of an unsustainable commodities rally, some reversion to normalcy in the Chinese regulatory environment, and a sizeable value unlock in top holdings Naspers and Prosus. Rand weakness also supported relative and absolute returns in the suite of multi-asset funds.
In June, global equities fell sharply on fears that the Fed can no longer orchestrate a soft landing. The S&P 500 Index recorded its worst first-half performance since 1970, while Chinese bourses were the best performing global stocks. Developed market bond yields rose, with US 10-year yields retreating as investor worries for untamed inflation gave way to recession fears. Oil fell for the first time this year and pressures in soft commodities also began to ease. Gold declined as real rates now on offer on some instruments increase the opportunity cost of holding gold.
In South Africa, equities tracked global bourses sharply lower, compounded by the JSE’s high weighting to economically sensitive resources companies. Largest index weight associate companies Naspers and Prosus surged on news of a share buyback strategy and the large non-resource rand hedge companies also proved resilient. Bonds posted negative returns as the yield curve shifted up on higher global bond yields, hawkish SARB commentary and net foreign selling.
The rand initially strengthened but ended the month weaker. The currency remains structurally vulnerable but should have some support near term given current inverse inflation differentials with the major developed economies.
It is noteworthy that the major strategic positioning across the funds has not changed materially in the last year or two. This should be expected given our repeated proclamations that we were positioning early for what lurks beyond the horizon, as forty years of managing risk has taught us to do. Our forward looking, safety-first approach keeps us alert to the risks and opportunities that lie ahead. The funds are well positioned to both protect investor capital through the bumpy markets and seize the long-term investment opportunities as and when they arise.