MARKETS IN A NUTSHELL - SEPTEMBER 2022
September was another difficult month as global equities continued their downward march with investors becoming increasingly worried about the prospects for economic growth. As uncomfortable as these events might feel, as long-term investors we take them in a positive light to the extent that the capital market distortions resulting from many years of absurdly loose monetary and fiscal policy settings are steadily unwinding. With every ratchet down, the prospective investment opportunities and concomitant expected returns improve markedly. We are excited about the growing opportunity set and the funds are well placed to exploit them for our investors.
Developed market equities fell sharply, with US bourses underperforming their European counterparts. Although earnings forecasts have yet to fall, the Conference Board is now forecasting that 2023 real GDP in the US will slow to 0.3% year-on-year compared to a previous 2022 estimate of 1.4%. At the same time, Europe confronts a potentially disabling energy crisis. Emerging markets underperformed, led lower by Chinese bourses as the country endures the consequences of its COVID-zero policy and a troubled property sector.
Fixed income markets provided no respite with developed market bond yields rising as the US yield curve stayed inverted (a reliable indicator of pending economic recession). The Bank of Japan is the only notable outlier as it continues to hold bond yields low through market manipulation as per its yield curve control policy – a potential source of global financial market instability should they be unable to hold the line.
Industrial commodities oil and copper declined as recession fears rose on the Fed’s resolve while soft commodities were mixed. The gold price continued its steady decline, which is somewhat perplexing given the elevated market risks, but is likely the result of the increased opportunity cost of holding a yield-free asset in a rising real interest rate, strong dollar environment.
In South Africa, the equity market tracked global bourses lower, but was supported by resources on rand weakness and stronger platinum group metals prices. Financials and industrials were sharply lower on the back of the weaker global investor sentiment.
The All Bond Index fell as yields moved higher across the curve on the global risk off environment, higher SA inflation and another SARB hike in the repo rate — core investments in the short to medium-term maturity buckets fell less than longer duration securities.
The rand weakened sharply against the dollar, partly a reflection of rampant dollar strength resulting from the global risk-off sentiment, but also partly the result of South Africa’s deteriorating terms of trade and rising political and fiscal risks.
High levels of liquidity have also been maintained across the funds to maximise flexibility in the volatile environment that is likely to persist for a while. The funds are well positioned to build on year-to-date outperformance as our base case bear market investment thesis continues to unfold.