Government bonds, particularly in Europe, were standout performers, benefiting from the dovish shift in interest rate outlook. The performance of UK Gilts and Italian bonds was particularly strong, supported by longer durations and favorable spreads. The corporate bond sector, encompassing high yield and investment-grade categories, also saw substantial gains. Emerging market debt emerged as the top performer, reflecting a diminished risk perception linked to the anticipated easing of US interest rates. The shift in market sentiment in 2023 was significantly influenced by key economic indicators. Lower-than-expected inflation figures in the US and Europe alleviated fears of persistently high interest rates, reshaping investor outlook. The Federal Reserve’s December meeting was a turning point, signaling a potential dovish shift in monetary policy. This, combined with the US economy’s steady growth and a robust job market, painted a picture of resilience and optimism, overshadowing earlier recession concerns. Global markets in 2023 were not immune to geopolitical tensions, particularly those emanating from the Middle East, which initially stoked volatility and inflation fears due to spiking oil prices. However, as these conflicts remained contained and oil prices subsequently eased, these concerns diminished. Nonetheless, China’s economic slowdown continued to cast a shadow over global commodity markets, underscoring the interconnected nature of global economies. While geopolitical risks persist into 2024 we believe that the main drivers of stock and bond markets will be inflation and associated policy as outlined in the 2024 outlook.

Entering 2024, the financial markets exhibit cautious optimism, underpinned by expectations of rate cuts by the Federal Reserve and a resilient global economic backdrop. However, the landscape is not without its potential pitfalls. The rally has led to heightened market valuations, raising questions about the sustainability of corporate earnings growth amidst evolving economic conditions. The rapid advancement in AI technology and its widespread impact is a critical area of focus. Moreover, persistent geopolitical tensions necessitate continuous vigilance, given their potential impact on global markets. Even after the year-end rally, we remain bullish on stocks. Of course, a correction is inevitable after the surge, but the odds are good that the equity bull market will be extended by continued disinflation and monetary easing. Both of which we believe will offset any softening in margins. This is further supported by history where after a bear market in U.S. stocks like the one in 2022, the average price gain in the following two years is about 60%. So far, the S&P 500 index has risen 32% from its 2022 lows and presumably, more price gains are expected this year. Of course, there is no guarantee that this historical pattern will be repeated, but it is useful to keep the rally in stocks in perspective.

We expect continued broadening of performance beyond just the Magnificent 7, especially those sectors and asset classes that lagged most of last year due to high rates. That doesn’t mean we are ignoring the real chance that these 7 stocks enter mania phase, similar to previous bubbles.

Global financial markets ended 2023 almost are strongly as they started, however besides select companies and sectors, the trajectory of returns between February and October was anything but upward. In fact in many instances throughout the year, it seemed like most financial assets were generally trending down. A major driver of volatility intra year was the sharp rise in global bond yields but this was put to bed as the US Federal Reserve kept rates unchanged once again at their December meeting where they appeared to signal the definitive end of the tightening cycle which came as a surprise to the market. This was a major catalyst to the performance of interest rate sensitive property stocks and bonds which were the best performing local asset classes in Q4. From an economic perspective, data released during December showed that the SA economy fared worse than the market expected in Q3, contracting by a QoQ rate of 0.2% compared with the consensus forecast of 0.0%. This comes after expanding by 0.5% in 2023.

It was pleasing to reflect on the recovery experienced in the fourth quarter across most positions within both the Iza Global Balanced and Equity Fund. This robust rebound marks a notable shift from the challenges we faced in 2022 and the particularly difficult second and third quarters of 2023. As you may recall from our earlier communications, following the market downturn in 2022, both Funds underwent a comprehensive review. This rigorous assessment involved a detailed evaluation and critique of each holding within the portfolio to ascertain its continued relevance and potential contribution. We meticulously weighed any potential modifications against the risks associated with crystallizing losses and possibly missing out on an anticipated market recovery.

I am pleased to report that the majority of these adjustments had a decidedly positive impact, particularly evident in the fourth quarter. This period was pivotal, accounting for the lion’s share of the year’s returns. The recovery extended beyond a narrow focus on our ‘Magnificent 7’ holdings, demonstrating a broader market rally. This was especially true for the Balanced Fund, where the changes implemented not only bolstered performance but also strategically steered the portfolio towards greater diversification. This shift is crucial for navigating macroeconomic headwinds similar to those encountered in 2022.

A prime example of our strategic realignment was the reduction of our stake in Fundsmith (which rose by 5.5% in Q4) in favour of incorporating a position in Nomura Global High Conviction (up 9.3% in Q4). Both funds share a similar investment style, ensuring that if this style returns to favour, we are well-positioned to capitalize on the upswing.

Additionally, we seized this opportunity to reduce the funds’ exposure to the USD, aligning more closely with our base currency of GBP. Despite Fundsmith and Nomura historically benefiting from a 60-80% exposure to USD, especially in the five years preceding the latter half of 2023, we anticipated a shift in this trend based on our macroeconomic projections. To safeguard our returns, we accessed the Nomura fund through the GBP hedged class, effectively mitigating currency risk and enhancing returns in both USD and GBP classes for the Balanced and Equity Fund. This approach paid dividends, particularly in November, when the USD exhibited marked weakness, yielding returns up to double those of the unhedged class.

Furthermore, Nomura outperformed several well-known names in the quality investment space, including Fundsmith and Investec Global Franchise. We attribute their success to their astute sensitivity to valuations, setting them apart from their peers.

We were also encouraged by the performance of Scottish Mortgage (up 21% in Q4), where we maintain a significant allocation in both funds. We have long maintained that the rapid increase in interest rates was a primary factor impeding Scottish Mortgage, compounded by unfavourable market sentiment. However, the fourth quarter saw a significant decrease in rates as the market began pricing in expected cuts for the upcoming year, and Federal Reserve Chair Jerome Powell indicated an end to rate hikes. We are optimistic that this momentum will continue as rates stabilize and the discount to net asset value narrows, likely improving market sentiment and further driving growth. The Balanced Fund also benefited from its bond holdings in Q4. The Rubrics Enhanced Yield Fund (up 4.5% for Q4) capitalized on the decreasing rates for sovereign bonds. This was complemented by the recent addition of the iShares GBP Hedged 7-10 year ETF ( up 6.17% for Q4) , accessed via the GBP hedged class to align with our currency strategy. Our allocation to gold also added value, as the weakening USD and retreating real rates made this asset class more appealing. We are exploring the possibility of utilizing a GBP hedged class for our gold holdings, mirroring the approach taken with our bond and Nomura positions. It is particularly gratifying to note that we concluded the year in the top 27% compared to our peers in the GBP EAA Global Flex category and in the top 30% in the local ASISA Global MA Flex category. While the path to recovery has not been linear, we are confident in the current strategic positioning of both the Iza Balanced and Equity Fund for the macroeconomic landscape ahead.