March was a volatile month for global markets as the Federal Reserve’s now 13-month rate hike cycle contributed to stresses in the banking system resulting in the closing of three regional banks, a forced takeover of Credit Suisse, government deposit backstops, and a new special lending facility for banks. The Nasdaq-100 (NDX) led the majors with a total return of 9.5% (USD) in March. For Q1, the NDX gained 20.8% (USD) marking its best first quarter since 2012. The S&P 500 and Dow Jones Industrials finished with strong monthly gains of 3.7% (USD) and 2.1% (USD), respectively. For the second consecutive quarter, the S&P 500 gained 7.5% (USD). The S&P 500 has never finished the full year lower when up more than 7% (USD) in Q1. Markets started the year with a strong January rally for equities. Fixed income markets also reacted positively to the decline in inflation and the prospect of easier monetary policy. In February, equity and fixed income markets were weighed down by strong economic data, which together with sticky core inflation forced investors to reassess their interest rate expectations and price in higher-for-longer interest rates. In March, the collapse of SVB and broader concerns around the financial sector hit bank shares hard, while government bonds rallied. The banking turmoil whipsawed the rates market, which in early March had just been coming around to the Fed’s higher for longer guidance.
That hawkish outlook changed on a dime, and the Fed Funds market quickly began pricing rate cuts as early as July. Given the cooler inflation data and the turmoil surrounding Silicon Valley Bank, the Federal Open Market Committee voted unanimously to raise the federal funds rate by just 25 basis points (bps) in March to a target range of 4.75%-5.00%. Global growth has generally surprised positively during the first quarter of 2023. This stronger growth is perhaps best illustrated by the rebound in the US and European composite purchasing managers’ index (PMI) business surveys since the start of the year. Lower energy and oil prices have probably played an important role in the improvement in business sentiment.
The markets in the first quarter of 2023 were tossed back and forth, first by data showing inflation stuck at uncomfortable high levels and a red-hot job market, which led to expectation of still more federal reserve rate hikes. That story got turned on its head with the collapse of Silicon Valley Bank and concerns about a credit crunch as the first quarter head into its final days. The positive returns in the first quarter of 2023 has offered some relief after the sea of red that was 2022’s performance.
The short-lived market turbulence that followed the collapse of Silicon Valley Bank (SVB) in March did not prevent investor optimism leading US stocks higher over the quarter. Growth stocks outperformed value in the quarter. In fixed income, government bond yields fell (meaning prices rose). As markets reacted to fears of a banking crisis, government bond markets went from pricing in rate hikes to discounting sizeable rate cuts in some markets. The US 10-year yield fell from 3.92% to 3.47%, with the two-year going from 4.82% to 4.03%. The UK 10-year yield fell from 3.71% to 3.49% and two-year decreased from 4.07% to 3.44%.
Looking ahead, the probability for another 25bp rate hike is currently 55% – 65%, but more importantly, the conversation is shifting to when and how fast the Fed will begin cutting rates. There are considerable uncertainties – in both directions – over the extent to which the recent turmoil will affect sentiment and activity. This uncertain backdrop argues against extreme positioning between or within asset classes. We believe that investors should maintain balance in their portfolios with a focus on quality within both equity and bond allocations.
South Africa’s FTSE JSE All Share Index declined by 2.1% for the month but gained 4.2% over the first quarter. In March, the Fini-15 index experienced a significant decline of 6.4%, primarily due to the poor performance of financial stocks. This downturn was largely attributed to the impact of the banking crisis in the US and the issues with Credit Suisse, which caused volatility and contagion to spread to JSE-listed banking counters. Gold prices experienced a boost in March due to the volatility in the equity and bond markets, as well as the uncertainty surrounding inflation. At the beginning of the month, spot gold was priced at $1,828 per ounce and it rose to nearly $2,000 before settling at $1,969 per ounce. As a result, gold shares on the JSE performed exceptionally well during the month, resulting in them being some of the highest market gainers over the quarter. South Africa’s annual inflation rate edged up to 7% in February 2023. This is the first rise in inflation since October 2022. At its March 2023 meeting, the SARB Monetary Policy Committee (MPC) decided to hike the repo rate by 50bps, lifting the magnitude from 25bps previously. Even though there was a larger-than-anticipated rate hike, the yields on South African 10-year government bonds decreased slightly to 11.1% at the end of the month. This can be attributed to the decrease in global bond yields, which had a positive effect on the South African bond yields. During the first quarter of the year, the rand depreciated by 4.6% relative to the US dollar.
All performance figures in ZAR unless otherwise stated.
Quote from Warren Buffet
I haven’t the faintest idea as to whether stocks will be higher or lower a month/year from now. What is likely, however, is that the market will move higher well before either sentiment, or the economy turns up. So, if you wait for the robins, spring will be over.
The Iza Portfolios
The Iza Global Equity Fund fell by 0.80% in March and gained 1.26% for the quarter. while the Iza Global Balanced Fund declined by 0.94% for the month and gained 1.32% for the quarter. The Stable Model Portfolio fell by 0.53% for the month and gained 1.45% for the quarter (All GBP returns).
Looking at the underlying fund managers we find that our gold holding made the largest contribution with a gain of 5.2% in March. This highlights the diversification advantages of including gold in the Iza portfolios. The Fundsmith Equity Fund gained 3.8% for the month. We have recently had meetings with Baillie Gifford – Scottish Mortgage to discuss the market sentiment of the investment trust in light of the ongoing disruptions in the boardroom. Scottish Mortgage emphasized that the investment and management team of the fund operate independently from the board and take a pragmatic and prudent
approach to the valuation techniques used in valuing their private equity holdings. These holdings were subject to large drawdowns on the fear that some of these companies may have had exposure to the collapsed SVB bank in the quarter. None of which did, however the fund got penalised as a result of contagion fear which swept the private equity market in the aftermath of the SVB closure. They also emphasized that Scottish Mortgages’ private listings are not venture capital holdings; instead, they are unlisted late-stage businesses with market capitalizations of over $10 billion. Overall Scottish Mortgage focuses on growth businesses, rather than reacting to the current macro climate. They maintain the belief that, over time, share prices will ultimately align with underlying fundamentals.
Funds’ Performance Summary
The majority of market capitalization gains for the S&P 500 have been generated by the 15 largest companies, with the rest of the index actually experiencing losses year-to-date. Notably, the combined contributions of Microsoft and Apple to the index’s returns have exceeded the negative impact of all financial stocks. In fact, only 10 companies are responsible for 90% of the market’s overall performance.
Source: Graphite Asset Advisory, Wall Street Journal
Bonds had a historic year in 2022, posting one of the worst returns ever recorded. This was largely due to a rapid increase in interest rates, the fastest seen in the past 40 years. As interest rates and bond prices have an inverse relationship, rising rates resulted in lower bond prices. It is important to note that interest rates hold a pivotal role in the dynamics of the bond market, as they directly affect the price of bonds. When interest rates are on the rise, existing bonds with lower interest rates become less valuable, and their prices decrease. Conversely, when interest rates are falling, existing bonds with higher rates become more valuable, and their prices increase. However, the current significant discount in bond markets presents an attractive opportunity for price appreciation. Additionally, investors have the potential to lock in strong yields as inflation is expected to subside in the years ahead.
Source: Visual Capitalist