February was a rollercoaster month that has left many investors on edge, especially with the focus on the “Magnificent 7”. The 2023 earnings reporting season kicked off with concerns about the narrow concentration of performance in these shares, causing a temporary pause in the rally of key growth stocks. However, a surprising turn of events – particularly with Nvidia’s robust report as the AI hardware powerhouse, managed to ease investor nerves and inject a fresh wave of optimism into the technology sector and overall market sentiment. This caused some rigorous debate within our investment team meetings on the relevance of a “FOMO trade” going on in the finance world. We have been adding selectively to these stocks since November and are quite pleased with the outcome so far.
Chinese authorities also stepped in with various interventions to boost investor confidence in listed assets. While these measures didn’t act as a magic cure, they did contribute to an overall improvement in the market backdrop. Despite the lingering tension in the geopolitical landscape, there was no groundbreaking news that significantly shook-up market prices.
US inflation turned out to be a bit of a disappointment, with the January CPI reading surpassing expectations. This led to a delay in the anticipated timing of interest rate cuts, as the rates market adjusted to the new information. Fortunately, resilient growth and stable labour markets allowed the Federal Reserve to communicate a patient approach to rate cuts until there is more confidence in the inflation outlook. Consequently, developed market sovereign bonds faced headwinds, with the US ten-year yield rising to 4.25% at the end of February.
In our funds and portfolios, we were neutral on offshore assets versus our own long-term Strategic Asset Allocation, but overweight versus many of our peers. The recent ZAR weakness (losing 2.78% to the USD) and outperformance of (especially) developed market assets helped our funds and portfolios to outperform on a relative basis.
In South Africa, the equity market struggled against the positive global backdrop. Weak earnings from mining and resource companies weighed heavily on the South African equity indices. The FTSE/JSE Resources 10 Index took a hit, losing -7.17% for the month and dragging down the overall FTSE/JSE Capped Swix Index, which posted a loss of -2.27%.
The market was eagerly awaiting the 2024 South African budget presentation. As a team, we were initially underwhelmed and, in some cases, rather concerned. But it was clear that the market saw things differently. The National Treasury showcased ongoing fiscal discipline, keeping fiscal deficits unchanged over the forecast period, and anticipating a growing primary surplus starting from this year, crucial for stabilizing debt levels. The forecasts exceeded market expectations, and the potential use of the GFECRA account was a point of keen anticipation. Fortunately, the rules governing its future use, clear communication, and transparency were satisfactorily addressed, adding credibility to its usage.
Overall, our portfolios have outperformed (on a relative basis) over the last few months. We continue to see opportunity in some areas in the SA landscape but prefer offshore assets for now. Bar some external event, this should remain the case until after the elections in May whereafter we will relook at our portfolios and adjust depending on the election outcome.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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