In continuation from last month, December exhibited positive trends for global equity markets, rendering the year 2023 noteworthy for exceptional equity returns. The MSCI World Index concluded the month with a 4.91% increase, resulting in a one-year return of 23.79%. Similarly, the MSCI EM Index demonstrated remarkable performance, achieving a 3.91% return and concluding the year with a cumulative gain of 9.83% [all figures in USD terms]. This robust performance was primarily attributed to the prevailing bullish sentiment in 2023, characterized by decreasing US inflation and the anticipation of imminent interest rate cuts by the US Federal Reserve. This sentiment gained further strength in December, following another subdued US inflation report prompting the Fed to acknowledge the potential for a resumption in interest rate cuts.
Despite the overall positive trajectory, the rally was rather lopsided. The “Magnificent Seven” group of major tech shares accounted for approximately 60% of the total index return in the past year. Broadening the perspective, around 70% of stocks underperformed the index, with approximately one-third experiencing declines in 2023. Consequently, the Nasdaq Composite Index emerged as the frontrunner for the year, registering a 43% increase in what has been coined the “Chat GPT” rally. Notably, Nvidia led this surge, concluding the year with an impressive 239% gain [all figures in USD].
Our fund and portfolios reaped the benefits of these returns, given our strategic overweighting in global equities relative to other asset classes, and a preference for Developed Market equities over Emerging Market equities. However, some of these gains in December were mitigated by a strengthening ZAR for clients investing locally.
The Chinese equity market proved to be a major disappointment in 2023, experiencing a year-to-date decline of -11.1% in USD. This downturn can be attributed to detrimental policies targeting sectors such as property, technology, private education/healthcare, all aimed at consolidating government control over the private sector and wealth redistribution.
Global bond markets performed well during the month, with the Bloomberg Barclays Global Aggregate Bond Index concluding with a 4.1% increase, driven by expectations of rate cuts and narrowing credit spreads.
Domestic markets mirrored global trends, with the JSE All Share Index gaining 2.0% in December. The Financial 15 Index, serving as a proxy for South African consumer stocks, concluded the month with a 5.5% increase. The Industrial 25 Index increased by 0.5%, while the Resource 10 Index declined by 1.3%.
The JSE All Bond Composite gained 1.5% for the month, and the composite inflation-linked bond index increased by 2.2%. The Rand appreciated due to foreign buying, strengthening from 19.08 to 18.34 during the month. However, this positive momentum was disrupted when it became international news that the South African Reserve Bank (SARB) and the National Treasury were contemplating withdrawing up to half of the SARB’s R497 billion contingency reserves (gold and foreign exchange) to alleviate the government’s debt burden and fund public-sector wages.
In summary, our portfolios were strategically positioned to capitalize on market conditions in December, maintaining a neutral to overweight stance on risk assets with minimal exposure to cash. The decision to adjust our property weighting to neutral proved beneficial, particularly with the SAPY Index experiencing a notable 9.9% increase. As we enter January 2024, we contemplate the possibility of realizing profits from Developed Market equities and reallocating them to Emerging Market counterparts, bearing in mind how critical the timing of such a move will be.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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