Volatility significantly decreased for April, as the S&P 500 posted a 1.46% (USD) gain for the month and 8,59% (USD) for the year. On a total return basis, mega and large caps sharply outperformed small and micro caps, with the Dow Jones returning 2.6% (USD), versus the Russell 2000 and Microcap falling 1.8% (USD) and 2.6% (USD), respectively, While the Nasdaq Composite rose just 0.1% (USD). At the sector level, Communications stocks were the top performers, ending the month higher by 3.8% (USD), followed by Consumer Staples and Energy, which returned 3.6% (USD) and 3.3% (USD), respectively. Industrials were the worst-performing sector, ending lower by 1.2% (USD), followed by Consumer Discretionary and Basic Materials ending lower by 0.9% (USD) and 0.1% (USD), respectively. Economic data showed that April was a positive month for the global economy with growth remaining remarkably resilient in the face of higher interest rates. US, eurozone, and UK Purchasing Managers Index (PMI) surveys all beat expectations, and China’s Q1 GDP print was also stronger than expected. The positive economic momentum supported risk assets despite further stress in the banking sector. Developed market equities rose by 1.8% (USD) over the month. Data in April showed economic activity remained resilient in the face of mounting headwinds.
Equity markets continued their rally and have now broadly recovered from the tumult in March. Worries about a potential recession in the United States have intensified due to the latest Q1 data. The estimates revealed that the US economy grew by only 1.1% compared to the previous quarter, falling short of the market’s anticipated 2% growth. While near-term recessionary risk seems to have receded somewhat, the closure of another US financial institution at the end of April highlights that the cumulative impact of central bank tightening has still not been fully felt by developed economies.
Falling energy prices helped bring headline inflation down in the major developed economies with the contribution from energy turning negative in the US and the eurozone. Base effects meant that energy took 0.5 percentage points off headline US inflation which printed below expectations at 5.0% year on year. Core inflation increased from 5.5% in March to 5.6% year on year in April. April also saw the first half of 1Q ’23 earnings prints. At the mid-point of the season, S&P 500 companies are reporting their best performance relative to analyst expectations since the end of 2021. EPS reports, saw companies beating nearly 80% of the time, above the 5-year average of 77% and the 10-year average of 73%.
Many people believe that the decision by the Federal Reserve to increase interest rates was unnecessary and misguided. While this action is not likely to have a significant impact on inflation, it might worsen the strain within the banking system. As a result of the banking crisis, there is a growing expectation that the Federal Reserve will soon shift towards an easing policy. The expected first-rate cut has been brought forward to July from September. It is expected that the Fed will cut deeper than what is currently anticipated.
The market’s response to the Federal Reserve’s policy has undergone a change. In the past, when the Fed took a more hawkish stance, bond prices would typically decline. However, since October 2022, there has been a reversal at the long end of the yield curve: long bond yields have frequently fallen in response to rate hikes and hawkish statements from the Fed. Since March, even 2-year Treasury yields have shown a negative correlation with the Fed funds rate, suggesting that the markets perceive further tightening as a policy error. Looking ahead from a broad cyclical perspective, conditions remain positive for both stocks and bonds. The Fed’s monetary tightening is most likely over, inflation will continue to move lower, and EPS will likely remain resilient. These are all good reasons for the bull market in stocks and bonds to continue.
In South Africa, the ongoing nationwide power outages, continued to have a negative impact on the economy. Many companies across different sectors attributed their weaker performance to the persistent electricity cuts. The manufacturing Purchasing Managers’ Index (PMI) contracted for the second consecutive month in March, dropping to 48.1. This decline was primarily due to worsening business conditions caused by frequent blackouts. The retail trade also experienced a decrease of 0.5% in February, while mining production contracted for the 13th month in a row, declining by 5%. The JSE had a strong month in April as the FTSE/JSE Capped SWIX index gained 3,4%. Around 35% of the JSE’s April performance came from the gold miners, making this grouping the best-performing industry on the JSE for the second consecutive month. South African 10-year government bond yields drifted higher in April, ending the month at 11.4%. the March data revealed that the annual inflation rate in South Africa exceeded market expectations. Consumer prices rose by 7.1% year-on-year, surpassing the forecasted 6.9%. The annual core inflation rate, which excludes volatile items like food, non-alcoholic beverages, fuel, and energy, remained steady at a six-year high of 5.2%, slightly higher than the market estimate of 5.1%. Furthermore, South Africa recorded a trade surplus of R6.9 billion in March, driven by a significant increase in both imports (31.7%) and exports (26.9%).
All performance figures in ZAR unless otherwise stated.
View from Warrant Buffett
While we can’t predict the shortterm movements of the market, we can focus on owning companies with enduring competitive advantages that can weather any market storm. In the long run, it is the quality of the business that will ultimately determine the success of our investments.
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The Iza Portfolios
The Iza Global Equity Fund rose by 0.27% in April. While the Iza Global Balanced Fund rose by 0.33% for the month. The Stable Model Portfolio gained 0.51% for the month. (All GBP returns).
Looking at the underlying fund managers we find that Berkshire Hathaway Inc was the portfolio’s largest contributor for April gaining 6,41% for the month. The portfolio’s largest detractor was Scottish Mortgage as they declined by 7,71% for the month. The portfolio’s largest holding Fundsmith gained 3.28% for the month. Over the month Fundsmith bought a small holding in Procter & Gamble. Fundsmith’s top 5 contributors in the month were Meta Platforms, Microsoft, L’Oréal, Novo Nordisk and McCormick. The Invesco Sterling Bond Fund gained 0,83% for the month and the Royal London Short Duration Credit Fund rose by 0,85% for April.
Looking ahead we continue to have pivotal economic data throughout the month of May. From a broad cyclical perspective, conditions remain positive for both stocks and bonds. The Fed’s monetary tightening is most likely over, inflation will continue to move lower, and EPS will likely remain resilient. These are all good reasons for the bull market in stocks and bonds to continue. Therefore, many managers are over-weighting growth versus value. Growth stocks tend to outperform the market when rates are falling, economic growth is slowing, and inflation is declining. Outside of the macro lens, May will also see the initial Preliminary Additions and Deletions list for the FTSE Russell indices.
Funds’ Performance Summary
Following the recent increase in interest rates on May 3rd, the United States is now witnessing levels of interest rates that haven’t been observed since 2007. The Federal Reserve has adopted an aggressive approach by implementing successive interest rate hikes to address persistent inflationary pressures. Remarkably, over a span of merely 14 months, interest rates have surged by approximately five percentage points.
Source: Visual Capitalist