June was an interesting month when looking at returns and market movement. It seems like inflation pressures are easing off (except for the UK) and Central Banks are starting to think about boosting economic activity rather than curbing inflation. With the FED keeping rates level in June, it gave some reprieve for other economies to relax their hiking cycle as well. There was, however, the understanding that we could expect another 25bps hike somewhere in the future, with the general consensus that that would happen sooner rather than later.
This gave global markets some much needed breathing space and it was well received by most market participants. We saw the S&P500 up 6.57%, MSCI World Index up 6.05% and the MSCI EM Index ending 3.8% higher for the month of June (all in USD terms). This also influenced the yield curve with rates pushing higher causing the Bloomberg Global Aggregate Index to end flat for June. But probably the biggest influence of the pause on rates was on the US Dollar. The USD Index had a tough time during June causing most currency pairs to strengthen versus the USD. This meant that foreign holdings of USD assets didn’t capture all of the upside that was on offer. This was particularly frustrating for investors riding the wave of tech stock gains (like Nvidia and Apple) only for returns to be muted in local currency terms.
Overall, our portfolios benefitted from diversified exposure between local and offshore assets with an overweight to developed market equity versus emerging markets. Our cautious view on risk assets was, however, a detractor during the month as risk assets outperformed cash and bonds over the period. Although we are seeing a shift towards emerging market exposure from some of our underlying managers in our portfolios, we are confident that the US markets still have some way to go and that capitals flows aren’t showing us enough evidence to trade into emerging markets just yet.
On the local side, a strengthening ZAR pushed a recovery in risk assets and caused yields to come down in our bond market. Although there are still many factors keeping foreign investment muted, there are some green shoots emerging. Loadshedding hit a rough patch at the end of May and the start of June but settled down considerably by the end of the month. This brought some small level of optimism during a tough market environment. Almost all equity indices ended the month in the positive, with only the Resources sector bringing the pack down with a return of -8.17% for the month. The clear winner for June was the Financial sector that ended the month 11.39% in the green. The positive outcome saw the JSE All Share Index jump 1.35% in June pushing the overall return for Q2 of 2023 just into the positive with a cumulative return of 0.66%. The biggest impact on portfolio returns, however, was the ZAR strengthening by 4.67%. This causes global assets to fall behind local asset returns for July, with the MSCI World Index ending only 1.1% in the positive and the MSCI EM Index dropping by 1.05% in ZAR terms.
The effect on our portfolios was that we benefitted from our risk asset exposure being diversified globally. Our bond and cash exposure (overweight) enhanced our relative returns, but we had a slight underweight on local risk assets which was not optimal. We still believe, however, that it is not yet time to switch heavily into risk asset exposure just yet. Our view is that diversification is going to be key in the coming months as we are yet to see how the SARB will react to the FED pausing rates and how much of an effect the reduced loadshedding schedule will have on our economy.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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