Markets in a nutshell — June 2023
Global equity markets rallied broadly again in June, seemingly immune to sticky inflation and possible further US, UK and Eurozone rate hikes. This capped a robust first half to 2023, with the MSCI World Index returning 13.9% in US dollars despite escalating geopolitical tensions, slowing economic conditions, hawkish central bank rhetoric and the US regional banking crisis.
The US S&P500 Index rose 6.6% in June, driven narrowly by a handful of megacap tech stocks on the frenzied artificial intelligence narrative. Underscoring the dominance of big tech, Apple made Wall Street history by becoming the first company to reach a $3 trillion market value. Apple’s rally helped the tech-heavy Nasdaq 100 Index post a blistering 40% return this year — its best first-half performance in history.
Despite one of the most aggressive tightening cycles in US history, the US economy is not slowing as expected. US inflation has moderated, but core measures remain stubbornly elevated. This is also true for the Eurozone and the UK, where rising prices are a key concern for central bank policymakers. Core inflation, which measures underlying pricing pressure by stripping out volatile food and energy prices, came in at 4.6% year-on-year for the US, 5.4% for the Eurozone and 7.1% for the UK — the highest level since 1992.
In a ‘hawkish skip’, the US Federal Reserve purposefully paused its tightening cycle in June. It nevertheless added two hikes to its peak rates forecast. The European Central Bank hiked 25 basis points and the Bank of England — in a determined bid to bludgeon down demand — surprised the market with a dramatic 50 basis points increase. All three central banks have worked hard to convince markets of their commitment to fight inflation. This reality appears to have finally hit home — US credit markets are now only pricing in rate cuts for 2024.
Global developed market bond yields increased close to multi-decade highs. US 10-year real rates are above 1.5% as the Fed’s tapering programme resumed after the regional banking crisis scare. In South Africa, the All Bond Index was the best performing asset class as yields moderated from recent highs. The FTSE/JSE All Share Index tracked global bourses higher, despite the headwinds of rand strength. Financials stocks led the gains, while resource counters heavily underperformed.
Against this backdrop, the Foord multi-asset funds in South Africa and abroad lagged more aggressively positioned peers. The Foord Equity Fund continues to ride rotational tailwinds as resources counters underperform. The Foord Global Equity Fund is more cautiously positioned and is under invested in US tech compared to its benchmark, which has been a drag on performance. The Foord fixed income funds continue to focus on quality instead of reaching for yield or duration.
Our view that rates would quickly rise and remain higher for longer has worked well to protect investors against negative returns in interest-rate sensitive asset classes. The global economy has now exited a period of massive fiscal and monetary policy stimulus. The surge in global inflation has shown that unconventional monetary policies bear costs. We are unlikely to see negative rates again. Surging government debt levels also limit fiscal capacity to counter slowing growth.
This means that risks to global growth for developed economies are skewed to the downside. We are safeguarding portfolios against drawdowns. However, high prevailing real yields mean the opportunity set is also greater. To take advantage, we have been cautiously but steadily increasing our allocation to shorter dated bonds in the Foord International Fund.
The era of easy money was the rising tide that lifted all boats. Markets rewarded excessive risk taking, not diligent fundamental analysis. Euphoria and subsequent investment returns are almost always inversely correlated. Accordingly, we have been careful to limit our exposure to shares and sectors that have been driven to extreme valuations by any popular theme — latterly the tech rally. Rather, we prefer well-priced investments in high-quality, sustainable businesses.
Looking ahead, we should not confuse the narrow market rally with the health of the global economy. Higher borrowing costs will continue to test economic and fiscal resilience. Government policy changes are also likely to add to macro volatility. And the more central banks feel compelled to raise rates, the more uncertainty there will be for the lagged, real-economy impact.
All these factors add risk. However, market volatility also provides diligent investors with attractive entry points for long-term investment. We continue to invest in a diverse array of opportunities across the globe — in businesses with solid growth prospects and at valuations which still imply significant upside potential.