The global economy remained unsettled in March. The Russia/Ukraine conflict continued unabated despite hopes for a full ceasefire agreement. Inflation continued its upward trajectory globally, with the latest reading for the United States at 7.9%. Oil prices closed the month above USD 100 despite the announcement by the US administration that they would release 180 million barrels from their strategic reserve. The quantum, while large, represents only 1% of daily demand over the next six months. Oil prices moved lower but not dramatically so. Despite all the negative sentiments major equity markets closed higher for the month. It is as if the market has acknowledged the overreaction experienced earlier in the quarter.
Over in China the government is struggling with how to manage the COVID pandemic, as President Xi’s zero-COVID strategy has been called into question, as Changchun, the capital of Jilin province, was put into lockdown due to a COVID outbreak. Shanghai itself currently has a suspected outbreak that has occurred in a large hospital in the city. COVID-induced global supply chain disruptions caused much of the initial move higher in global inflation.
Conflict-induced higher energy prices have supported the rise in inflation globally. The US Federal Reserve finds itself in a difficult position as rate hikes impact economywide price levels only 12 to 18 months post-hike.
Strong US employment levels give them some space to hike aggressively hoping to keep high inflation levels transitory, and not allow longer term inflation expectations to rise. In March the Fed hiked rates 0.25% and forecast 6 more hikes for the year, a sharper hiking cycle than initially expected. In fact, current probabilities point to a 0.50% hike at the next meeting.
US unemployment declined to 3.6% at the latest release and growth in wages continues, although only in nominal terms. The consensus forecast is for continued decline in unemployment from already low levels.
For March, the MSCI World, S&P 500, and Nasdaq Indices returned 4.0%, 5.6% and 6.3% respectively, all in GBP terms. For the quarter returns were -2.8%, -2.0% and -6.3% for the MSCI World, S&P 500, and Nasdaq indices, respectively. This highlights how the markets have digested the uncertainty of conflict and a rate hiking cycle and recovered over the month from the year’s lows.
The South African equity market, along with fellow emerging markets Brazil and India, were the only major global markets to deliver a positive return for the first quarter of the year with the FTSE/JSE All Share Index rising 2.4% for the quarter. The index fell 0.8% for the month though. Mining shares have been a key driver of performance YTD as the strong increase in commodity prices have supported earnings, the Bloomberg Commodity Index is up 15.3% in USD YTD and 50.0% over the last year. This commodity strength has also been supportive of the rand.
The South African Reserve Bank (SARB) delivered a 0.25% interest rate hike as expected at its March meeting. Whilst this is the third consecutive hike of this tightening cycle, the current repo rate of 4.25%, remains 2% below the level set going into the pandemic. This level remains prudent as February’s core inflation data at 3.5% YoY is well within the SARB’s 3%-6% target range. Headline inflation however, which includes the volatile food and energy categories, rose 5.8% and is expected to breach the target range as the Ukraine conflict puts pressure on food and energy prices. SA 10-year government bond yields followed global yields higher, briefly touching 10.7% intra-month before settling just below 10.0% at month-end (0.1% higher for the month).
Message from Manager
From 1995 to date, the ZAR has depreciated at an annual rate of 4.5% against the GBP. This effectively gave offshore investors an extra kicker to investment returns in ZAR. Since the end of 2021, the ZAR has appreciated 11.3% against the GBP compounding investment losses in the Iza feeder fund range. Such periods of ZAR strength have happened in the past and have proven to be short lived.
Orrin Flugel, CFA, CAIA
Fund Manager – Iza Capital
The Iza Portfolios
The Iza Global Equity Fund rose 3.5% MoM, (GBP returns), while the Iza Global Balanced Fund grew by 3.3% (GBP returns) and the Stable Model Portfolio 1.2% (GBP returns). On a quarterly basis the funds declined 15.8%, 11.9% and 7.0% respectively. Uncertainty remains elevated at present, but markets have moved off their YTD lows.
With global inflation on an upward trajectory central bank rates will increase going forward, raising short term rates. The downscaling of quantitative easing should cause long term rates to increase as well. Thus, while we did experience some yield curve inversion in March this does not necessarily mean a recession is at hand. Research shows inversion needs to persist for an elongated period (weeks or even months) for the signal to have high predictive power on average.
Even then a recession is not imminent, and it can take anywhere from 12 to 24 months for the economy to contract. Also, important to note is that the previous four times the US 10yr and 2yr yield curve inverted the S&P Index rallied for another 17 months and gained 28% to the peak.
The underlying equity managers hold a basket of quality, transformative, high growth potential stocks, representing the forefront of technological progress. These stocks have exhibited a higher market beta than stocks in the more traditional Materials or Energy sectors. Thus, the fund has underperformed for the quarter. We remain confident in our own investment process, as well as that of the underlying managers. We expect a turnaround in performance as the year progresses, and uncertainty in global markets recedes.