The table below provides a review of key domestic and international investment indicators for the past quarter, as well as over longer periods.
South African asset classes (in rands)
(Performance over periods to 31 March 2024)
Source: Morningstar
Global asset classes (in dollars)
(Performance over periods to 31 March 2024)
Source: Morningstar
Currencies
(Performance over periods to 31 March 2024)
Source: Morningstar
* Updated annually from 1900, or longest available period
Returns for periods longer than 12 months are annualised.
INTERNATIONAL MARKET COMMENTARY
The first quarter of 2024 proved to be a strong one for risk assets, with several major equity indices reaching record highs as continued excitement around artificial intelligence (AI) and growing hopes for a soft landing played a significant role in steering market dynamics. The “Magnificent 7”, a group of technology and AI-related stocks, were up over 17% during the quarter and among them, Nvidia stood out, surging by +82.5% following strong underlying earnings growth. Strong returns for these stocks helped the S&P 500 reach a new all-time high, however robust economic growth and unemployment data also helped support market optimism. Positive economic developments were also not solely isolated to the US, with the Euro Area defying market expectation by sidestepping a technical recession in Q4 and subsequently releasing a number of data points that suggested an improvement in economic momentum.
Naturally, economic robustness was met with central bank resolve as officials from the US Federal Reserve, European Central Bank and Bank of England decided to hold rates steady, whilst also signalling that imminent rate cuts were unlikely. This, alongside hotter-than-expected inflation readings forced some investors to rethink their projected path for interest rate cuts and reduce the number of cuts expected this year. The result having negative implications for the bond market, where climbing yields led to some capital loss. Staying on rates, and whilst most countries in the west are deciding on when best to cut rates, March saw a significant milestone in Japan as the Bank of Japan ended their negative interest rate policy, raising the base rate for the first time in 17 years.
Unfortunately, the start of 2024 also saw a continuation of the geopolitical concerns that punctuated much of last year, with the Houthi rebels launching attacks on commercial shipping in the Red Sea which resulted in the US and UK conducting retaliatory air strikes. Furthermore, towards the end of January, a drone attack claimed the lives of three U.S. troops in Jordan, heightening concerns about a broader escalation in the region which were present through much of the first quarter.
Given this backdrop, overall it was a very good quarter for market returns. Global equities increased by +9.4%, with Japanese (+18.6%) and US equities (+10.4%) the best performing areas, helped by the strong performance of technology stocks. Europe ex UK (+8.3%) also performed well, whilst the UK (+4.0%) and Emerging markets (+4.2%) lagged the broader market. In terms of equity styles, growth stocks (+9.5%) outperformed value (+7.0%), and small-cap stocks (+3.9%) underperformed large caps (9.4%), essentially because interest rate expectations increased. This was reflected in sector performance, with Information Technology (+12.0%) and Communication Services (+11.2%) the strongest two sectors, whilst Materials (+1.9%), Utilities (+1.7%) and Real Estate (-1.6%) lagged significantly.
Fixed income markets were more mixed, with clear dispersion between government bonds and lower quality credit. Looking at the detail, global government bonds (+0.2%) and Global Investment grade credit (+0.2%) finished the quarter flat, lagging the riskier areas as the strong rally in equities helped spreads to tighten. This was seen in global emerging market debt (+1.4%) and especially global high yield (+2.0%).
In the real assets space, both global real estate (-1.4%) and global infrastructure (+1.4%) lagged the broader equity market, reflecting their sensitivity to rising interest rate expectations. Commodities were strong over the quarter with Crude Oil (+17.7%) and Gold (+7.4%) rallying in part due to the ongoing geopolitical tensions in the Middle East.
DOMESTIC MARKET COMMENTARY
The State of the Nation Address (SONA) held in February contained few revelations but confirmed that the current Social Relief of Distress (SRD) grant would be extended and enhanced from its current form. The address also referred to incremental NHI implementation, while infrastructure investment and reforms (increased private sector involvement) remained centre stage. The 2024 Budget delivered by Finance Minister Godongwana did not contain any evidence of election-type spending or policy deviations, and the market reaction reflected this.
The outcome of South African elections to be held on 29 May and the make-up of coalitions (if any) create more uncertainty than the same time last year. For the last 30 years, SA has been a one-party-dominant state (the ANC). The expectation is that a host of new and smaller parties will eat away at the support of the existing big parties (ANC, DA, EFF). All three of them are vulnerable. The known unknown is how much of the vote the ANC will get and, dependent on that, who will it partner with in a coalition if its support falls below 50%. The recent launch of the MK Party adds complexity to the range of outcomes. We are looking for policy continuity and certainty, while hoping for policy implementation and improvement.
The South African Reserve Bank (SARB) is scheduled to have its next meeting on May 30th, the day after the South African elections. The expectation is that rates will be maintained at 8.25% until September when the combination of lower SA inflation prints plus rate cuts from the UK, Europe, and the US should justify a rate cut from the SARB.
Inflation in South Africa spiked to 5.6% y/y in February, from 5.3% y/y in January and 5.1% y/y in December. The overshoot relative to the forecast for 5.5% y/y was mainly due to an even higher than expected jump in medical aid tariffs. Core inflation was also marginally higher than expected, at 5% y/y. Expectations are for a moderation of food price increases. This, together with anticipated rate cuts (moderate) will be supportive of improved consumer demand in the latter half of the year.
On the electricity front, RMB Morgan Stanley note that the average stage of loadshedding was 1.8 for the first two months of this year, versus 3.8 for the same period in 2023. Additionally installed rooftop solar capacity has more than doubled to 5.4GW from the 2.4GW a year ago. Strong global markets and resource shares helped to lift the FTSE/JSE All Share Index to a 3.2% return in March, its first monthly gain for the year, still ending the quarter down -2.2%. SA Listed Property and the All Bond index posted losses of -1.0% and -2.0% respectively over the month, ending the first quarter at 3.8% and -1.8% respectively. The rand did appreciate relative to the US dollar in March, boosted by the price of gold – one of South Africa’s key exports, but is 3.2% weaker relative to the US dollar for the quarter.
Source: Market Review by NPW Investment Research
DISCLAIMER
Nedgroup Collective Investments (RF) Proprietary Limited is an authorised Collective Investment Scheme and the representative of Nedgroup Investments Funds PLC in terms of the Collective Investment Schemes Control Act. It is a member of the Association of Savings & Investment South Africa (ASISA). Collective Investment Schemes are generally medium to long-term investments. The value of your investment may go down as well as up. Past performance is not necessarily a guide to future performance. Nedgroup Investments does not guarantee the performance of your investment and even if forecasts about the expected future performance are included you will carry the investment and market risk, which includes the possibility of losing capital. Our funds are traded at ruling prices and can engage in borrowing and scrip lending. Certain funds may be subject to currency fluctuations due to its international exposure. Nedgroup Investments has the right to close funds to new investors in order to manage it more efficiently. A fund of funds may only invest in other funds, and a feeder fund may only invest in another single fund, both will have funds that levy their own charges, which could result in a higher fee structure. A schedule of fees, charges and maximum commissions is available on request from Nedgroup Investments.