The month of July saw some interesting moves by Central Banks with a subsequent weakening of the US Dollar. This, in contrast to May and June, made local assets look relatively good versus their global peers especially when measured in USD terms. So, the main drivers of returns for the month were predominantly risk assets and, in particular, local risk assets.
Looking at global trends, the sell-off in the USD through the latter half of July didn’t curb the appetite for US risk assets. The S&P500 and Nasdaq indices continued their bullish run, despite talks of economic pressures, debt ceilings and overspending and possible recessions. The effect on markets was that (in USD terms) the MSCI EM Index (6.26%) outperformed the MSCI World (3.36%) as well as the S&P500 (3.18%) and the Nasdaq (3.83%). This also influenced the yield curve with rates pushing higher causing the Bloomberg Global Aggregate Index to end “flattish” for the month of July. Because the USD had a tough time during July, most currency pairs strengthened versus the USD. This meant that foreign holdings of USD assets didn’t capture all 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. Our cautious view on risk asset 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, the pause on interest rates was a welcome reprieve to a struggling consumer. This is one of the most concerning factors to our economy currently as we stagger towards a possible cost of living crisis in South Africa. Although headline inflation is steadily edging lower, food inflation (and other essentials) is still “stubbornly high” as depicted by Deloitte and StatsSA:
Food inflation vs. headline inflation
Source: Deloitte & StatsSA Jan 2020 – May 2023 (year-over-year %)
This, along with continued loadshedding is weighing heavily on our economic growth struggles. Despite this, however, we saw a strengthening of the ZAR in July, pushing a recovery in risk assets and causing yields to come down in our bond market, although only slightly. This brought some small level of optimism during a tough market environment. All equity indices ended the month in the positive, with the financial sector leading the way once again returning 7.94% in July. The positive outcome saw the JSE All Share Index jump 4.01% with Resources (3.66%) edging back some returns after June and Property also keeping a steady pace returning 2.3%. The biggest impact on portfolio returns, however, was the ZAR strengthening by 5.86%. This caused global assets to fall behind local asset returns for July, with the MSCI World Index down 2.7% and the MSCI EM Index ending flat (all in ZAR terms).
The impact on our portfolios was that we benefitted from our local risk asset exposure and the diversification of global assets. 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 the time to switch heavily into risk asset exposure just yet. We do have the benefit of some protected AMCs in our funds with IP Active Beta having capital guarantees on 40% of local and 40% of global risk assets. This gives us more scope to increase risk asset exposure going into August if and when we see the opportunity.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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