Global stock markets experienced a decline due to the expectation of “higher for longer” interest rates, which negatively affected equity valuations. Additionally, the Israel-Hamas conflict dampened investors’ appetite for risk. Developed market equities saw a 2.9% (USD) decrease over the month, while emerging market stocks fell by 3.9% (USD). Notably, growth stocks showed greater resilience compared to their value counterparts, with a return of -2.4% (USD) for growth stocks versus -3.4% (USD) for value stocks during the month.

Commodity prices saw a reversal of some of their year-to-date declines in October, as the broad Bloomberg Commodity Index increased by 0.3% (USD). The tragic events unfolding in the Middle East prompted a flight to safety, leading to a rise in gold prices. Meanwhile, concerns about the potential disruption of oil supplies in a wider regional conflict boosted oil prices, although the price of Brent Crude remained below its peak in September. In the UK, despite a notable emphasis on the energy sector, the FTSE All-Share experienced a 4.1% decline in October. While still the top performing regional market year to date, Japanese equities struggled to maintain momentum in October. The TOPIX Index fell 3.0%, despite continued weakness in the yen.

The MSCI Europe ex-UK Index declined 3.3% on the month, as cracks continued to emerge in the economic outlook for the eurozone. In China, there were positive surprises in third quarter GDP, industrial production, and retail sales. Nonetheless, continued weakness in the real estate sector, and reports of new US restrictions on AI chip exports to China further dampened market sentiment.

Cash has been king since the Federal Reserve began its fight against inflation, while stocks have taken a dive. Now, the appeal of cash is fading, and a select group of stocks looks more interesting. The flow of money into cash-like investments is waning. The net movement into short-term Treasury bill funds last week was just under $2 billion, a number that has consistently declined from the peak of near $10 billion in 2022. Equities have the potential to perform well over the next few months as signs that the economy is slowing down raise expectations that the Fed could cut interest rates within a year. The rate of inflation is on the decline. Lower inflation, and the reduced interest rates it can bring, are what the stock market wants to see. The S&P 500 averages a 9.5% annualized gain in each month leading up to a rate cut after the final increase in a tightening cycle. That equates to a 0.8% gain for each month.

In October, the South African stock market experienced its third consecutive month of losses, echoing the negative trend seen in global equity markets. This decline pushed the overall performance for the year further into negative territory, with a year-to-date loss of 3.2%. The primary factor behind this downward trend appeared to be geopolitical uncertainties, which had a more significant impact than the usual influence of higher interest rates on the price of precious metals. Despite the challenging market conditions, there were a few exceptions at the company level that showed positive performance, such as Tiger Brands, which saw a 12% increase in its stock value month-on-month. This boost was attributed to the announcement of new management, raising hopes of a potential turnaround in the company’s fortunes. South Africa’s recent inflation data revealed that headline inflation had accelerated to 5.4% year-on-year, driven by rising food and energy prices, in line with expectations. On the other hand, core inflation, which excludes volatile categories, slowed to 4.5% year-on-year, coming in below the anticipated rate of 4.7%. While the US dollar had been strong in recent months due to higher US interest rates and general risk aversion in the global markets, the South African rand managed to hold its ground relatively well. In fact, it was among a small group of currencies that strengthened against the US dollar in October, posting a 1.5% month-on-month increase.

All performance figures in ZAR unless otherwise stated.

The Iza Global Equity Fund declined by 4,06% (GBP) in October. While the Iza Global Balanced Fund declined by 2,61% (GBP) for the month. The Stable Model Portfolio declined by 1,17% (GBP) for the month.

In the last month, we’ve closely observed the evolving macro and geopolitical landscapes. As a result, strategic adjustments have been made to our portfolio to better align with upcoming opportunities and the inherent risks in the current macro environment. Specifically, we’ve divested a portion of our Smithson holdings within the Iza Global Balanced Fund. To capitalize on perceived opportunities and navigate the risks, we’ve opted to increase our bond exposure. This adjustment involves acquiring 7-10 year US Treasury bonds. Our rationale for this move is rooted in the belief that the Federal Reserve is approaching the end of its interest rate cycle. The potential in the bond market hinges on the outcomes tied to the Federal Reserve’s decisions on interest rates. Anticipating that the Fed maintains the existing interest rate levels, we project a yield of approximately ±5% on our US Treasury holdings. Conversely, if the Fed opts to decrease interest rates, the yield may diminish. However, this will lead to capital appreciation on our bond holdings.

Within the Iza Global Equity Fund, our ongoing commitment is to maintain our holdings at their designated target weights. Our confidence persists in the belief that the selected fund managers will deliver superior performance in the long run, irrespective of the prevailing short-term macroeconomic conditions.

A challenging operating environment has started to separate many strong business models from the weak. While the recent S&P 500 correction has spared few companies, those with strong balance sheets have weathered the storm better than unprofitable technology names, demonstrating the quality of companies that many investors favour today. With the S&P 500 cost of capital at its highest level in roughly a decade, we believe dispersion among index constituents will continue.

Source: GS GIR and GS Asset Management. As of November 2, 2023.

Historical periods of S&P 500 total returns greater than 10% from January through July followed by a drawdown from August through September have yielded strong fourth quarter returns. Specifically, the index has provided fourth quarter returns of 6.3%, on average, while delivering positive performance in every instance. The recent rate surge may have delayed this rally, but history suggests a strong close to the year may still be achieved.

Source: GS GIR and GS Asset Management. As of November 2, 2023.