Markets in a Nutshell - October 2022
Developed market equities rallied, with US bourses outperforming their European counterparts. Despite rising bond yields, the US Dow Jones Industrial Average posted its best October on record as third-quarter US GDP surprised on the upside. Emerging markets underperformed, led lower by a sharp decline in Chinese stocks after the precedent-breaking extension of President Xi’s tenure and consolidation of his power base. Coupled with little guidance on the lifting of the puzzling zero-COVID policies, this triggered the steepest five-day decline in the history of Hong Kong’s HSI.
Developed market bond yields diverged as US yields rose while European sovereign yields declined. The Bank of Japan, a marked outlier, continues to hold rates down through market manipulation. The Japanese 10-year bond yield is little changed since the beginning of the year, while other developed market yields have risen notably, which has caused a significant depreciation of the Japanese yen (-22.5% year to date vs the US dollar). Potential instability in the world’s second largest bond market continues to be a significant tail risk possibility.
Industrial commodities oil and copper and soft commodities wheat, corn and soybean were mixed as supply constraints and recession fears pulled in opposite directions. Precious metals were also mixed with gold continuing its steady decline on rising US dollar real interest rates. The managers remain cautious of commodities in aggregate given the rising probability of a global recession but maintain a meaningful allocation in specific materials companies with strong longer term fundamentals.
In the international allocations, US agricultural chemicals company FMC and copper miner Freeport-McMoran contributed the most to fund returns while the short S&P 500 futures hedge detracted most in what we regard as a bear-market rally. The full allocation to select consumer services and consumer discretionary companies (many of which were caught up in the negative China sentiment) also detracted. The managers maintain high conviction in these positions. Importantly, with its conservative approach, the Foord International Fund has continued to defend investor capital this year, with the fund falling -6.9% against a global equity market decline this year of -20.1%.
In South Africa, the FTSE/JSE Capped All Share Index tracked global bourses higher, led by financials and resources while industrials were also positive. Investments in Aspen, Anheuser-Busch Inbev, Standard Bank and Spar were the top contributors across the Foord South African equity allocations while media giants Naspers and Prosus detracted on weakness in underlying Chinese technology asset Tencent.
The All Bond Index rose as yields moved lower across the curve on the positive global investment sentiment with core investments in the 7 to 12-year and 12-year + maturity buckets contributing positively to Foord’s multi-asset funds. Bond yields are still attractive despite the rising country risk premium given the country’s political and economic risks.
The rand weakened on continued US dollar strength given rising interest rate differentials and the greenback’s safe-haven appeal — although relatively cheap at current levels, the rand remains vulnerable longer term given the country’s lack of competitiveness and stretched public finances.
In summary, we don’t think that global financial markets are out of the woods just yet. As such, the protection of capital and the management of risk remains the priority. Foord’s portfolios are balanced, well-diversified, and positioned to deliver meaningful inflation-beating returns over time.