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 December 2023)
Source: Morningstar
Global asset classes (in dollars)
(Performance over periods to 31 December 2023)
Source: Morningstar
Currencies
(Performance over periods to 31 December 2023)
Source: Morningstar
* Updated annually from 1900, or longest available period
Returns for periods longer than 12 months are annualised.
INTERNATIONAL MARKET COMMENTARY
The fourth quarter of 2023 was virtually the mirror opposite of the prior quarter i.e., a poor start but a very good period for markets overall. This was primarily due to a big move lower in government bond yields during November and December, which came after the US 10-year government bond yield peaked at just over 5% in October, a level not seen since the 2008 Financial Crisis. As we have highlighted before, moves in bond yields impact most financial assets as investors attempt to value investments through present valuing future cash flow streams. And if the discount rate (government bond yield) moves lower the present value of those cashflows increases. As such markets generally like falling bond yields, especially if economic growth is also not slowing too much. There were several good reasons during the quarter for the sharp fall in bond yields. Firstly, continuing signs of falling inflation come from the US, Eurozone and even the UK, reducing near term concerns surrounding the potential stickiness of inflation (due to tight labour markets). Secondly, declining oil prices not only helped with the broader falling inflation picture but also the ‘soft landing’ growth outlook as high energy prices are essentially a tax on activity. Finally, and perhaps most importantly was the more ‘dovish’ central bank rhetoric coming from the US Federal Reserve, its language seemed to change (over the space of a few policy meetings) regarding interest rates, from ‘higher for longer’ to ‘higher for not much longer’. The market took this as signal to price in a significant number of rate cuts for 2024, whether all these cuts will occur is maybe asking too much. Nonetheless, it was very supportive for virtually all markets in the last few months of 2023.
Beyond inflation and interest rates, geopolitical risk also eased during the last few months of the final quarter. The Israel – Gaza conflict looked like being contained, whilst an awful loss of life, this reduced the risk of a much broader regional conflict; with both sides agreeing to a temporary truce combined with a release of hostages towards the end of November. Signs of easing US – China tensions were also witnessed in November with a meeting between US President Biden and Chinese President Xi Jinping at the Asia-Pacific Economic Cooperation Conference in San Francisco. The hope is that the more positive tone that came from this meeting (the first time the two have met in about a year) can translate into a reduction in uncertainty and a better economic relationship going forward.
How did all this translate to financial markets? Well overall it was a very good quarter for market returns. Global equities increased by +9.4%, with US equities (+11.8%) the best performing area, helped by the strong performance of technology stocks. Emerging Markets (+5.6%), and Europe ex UK (+5.6%) also performed well, whilst the UK (+2.3%) lagged due to its higher exposure to commodities (especially oil) which fell during the period. In terms of equity styles, growth stocks (+12.8%) outperformed value (+9.3%), and small-cap stocks (+12.1%) outperformed large caps, essentially because interest rate expectations declined. This was reflected in sector performance, with Information Technology (+17.6%) and Real Estate (+15.0%) the strongest two sectors, although Industrials (+13.4%) and Financials (+12.6%) were not far behind, whilst Energy (-2.7%) lagged significantly as oil prices fell.
Fixed income markets were also strong, in fact certain bond markets posted their best quarterly return in decades, with the global aggregate bond index rising +6.0% over the quarter. Looking at the detail, global government bonds (+5.3%) performed well but lagged riskier areas as the strong rally in equities helped spreads to tighten. This was seen in global investment grade credit (+7.5%), global high yield (+6.7%), and especially global emerging market debt (+9.3%). In the real assets space, both global real estate (+15.6%) and global infrastructure (+11.2%) performed very strongly, reflecting their sensitivity to falling interest rate expectations. Commodities displayed mixed performance in the quarter. While the broad index was negative (-4.6%), there was significant divergence within the index. Crude Oil (-17.5%) fell back further due to higher-than-expected inventories, lower demand outlook and declining geopolitical risk, whereas Gold (+11.4%) rallied on the back of the market’s expectation for steeper cuts by central banks and a weaker US dollar.
DOMESTIC MARKET COMMENTARY
After a nail-biting Rugby World Cup tournament, the Springboks brought home the Webb Ellis Cup. Resilience, hard work and perseverance gave moments of joy and hope our nation. Other highlights during the quarter included the noteworthy developments in the energy landscape. Cabinet’s approval of the draft Integrated Resource Plan (IRP) 2023, which outlines the intended mix of energy generation for the upcoming years. After some delay, the seventh Bid Window for an additional 5000MW of renewable energy was announced in December. Eskom will see new leadership, with Daniel Marokane taking the reins as the new CEO in upcoming months. Despite ongoing contestation, the National Health Insurance (NHI) Bill passed through the National Council of Provinces, ascending to the desk of President Ramaphosa. Meanwhile, the Medium-Term Budget Policy Statement (MTBPS) in highlighted weaker fiscal metrics, a result of reduced revenues given lower commodity prices and weak economic growth, in addition to expenditure pressures.
In terms of economic data, local inflation eased back to 5.5% in November after peaking at 5.9% in October and after two consecutive quarters of growth, South African real gross domestic product (GDP) contracted by 0.2% in the third quarter. The agriculture industry declined by 9.6%, driven lower mainly by field crops, animal products and horticulture products. The industry encountered several headwinds in the third quarter, including the outbreak of avian flu and the floods in Western Cape.
Domestic assets rallied alongside global equity and bond markets. The FTSE/JSE All Bond Index gained 1,4% in December, bringing the returns over the quarter to a punchy 8,1%. With a weaker US dollar offering respite, the rand appreciated by 3,3% against the greenback over the quarter, bringing the depreciation year to date to 7,6%. Local equity markets continued its recovery in December, with strong returns from domestically focussed mid and small cap counters. It was not all smooth sailing, however, as Chinese regulators published a draft regulatory framework for the online gaming industry, seeking to curb excessive spending. Markets had a kneejerk reaction, which saw Naspers (- 9,7%) and Prosus (-10,6%) mirror monthly losses from Chinese technology company Tencent (-10,2%), although the intraday moves were more extreme.
Local equity markets ended the quarter in the green, with the FTSE/JSE All Share returning 6,9% with gains across industrials (5,9%) and financials (12,3%). While large capitalisation stocks benefitted from the broader rally, mid (10,0%) and small cap stocks (8,6%) had even more to gain from improved market sentiment. Declining bond yields and the prospect of lower interest rates also helped the property sector stage a comeback over the quarter with a return of 16,4% alongside other interest rate sensitive assets, improving the returns for 2023 to 10,1%
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.