In this environment, diversified bonds/equities portfolios have posted some of the weakest performance of the past decades. The U.S. dollar has benefited from Fed hawkishness and its safe-haven appeal during times of market volatility. In real trade-weighted terms, the U.S. dollar is the strongest since the mid-1980s. Overall, markets still appear to be expecting positive, but below potential growth, elevated but falling inflation and tight monetary policy. Global inflationary pressures moderated somewhat over the quarter on the back of lower oil and food prices. The WTI (West Texas Intermediary) oil price has dropped by nearly 30% since the start of July.

Overall, inflation is still expected to moderate in the coming months, but core inflation is expected to remain above the Fed’s target. That said, the Fed’s tighter monetary policy is already cooling down some parts of the economy, such as the housing market, as 30-year fixed mortgage rates have risen to well above 6%, their highest level since 2007. One positive, though, is that against a backdrop characterized by elevated inflation and slowing growth, global equity market valuations have now generally fallen below their 25-year averages.

Even in the US, the market is currently trading on a price-to-earnings (P/E) ratio of 15.6 vs. a long- term average of 16.6. It appears to us that the market has overcorrected to the downside. Growth stocks are the most undervalued, trading at a price/fair value of 0.75, followed by the value category trading at 0.77. Over the next six to 12 months, we expect that the markets will remain under pressure and volatility will remain high. To establish a bottom, the markets will need clarity as to when economic activity will make a meaningful and sustained rebound and evidence that inflation will begin to trend downward and return to the Fed’s 2% target.

Rising rates in the US and global markets pointing towards a major slowdown, and the war in Ukraine has caused the US dollar to appreciate against most major currencies. The dollar is up a record high of 17% against the British pound. The weakness of the pound was further aided by the UK government’s announcement of sweeping tax cuts funded by steep increases in government borrowing. It’s hard to find much good news, but one source of comfort is that investor sentiment is very negative, providing some reassurance that markets have already accounted for the bad news.

South African equities fell in line with global peers over the quarter. The FTSE/JSE All Share Index fell -4.2% for the month and -1.4% for Q3. The Capped SWIX was down -3.8% and -2.4%, respectively. Leading the fall this year is industrials -16.8%, followed by resources -6.5% and financials, which shed -3.0% of their value. Capitec was the worst-performing major stock on the JSE declining by -24% for the month. The JSE All Bond Index managed to end the quarter on positive footing, up 0.6%. Listed property (JSE ALPI) extended losses, down -4.1% in Q3. Resources suffered from the fall in most commodity prices as investors started worrying about China’s zero covid policy and the impact on its economy. The Rand breached R18/US$ for the first time since May 2020, while also losing ground to the euro and Sterling. The manufacturing PMI slid back into contraction in September, coming in at 48.2, a drop from 52.1 in August. Incoming data suggests the SA economy likely entered a recession in Q3. Continued power outages, and a lack of business confidence and policy reform continue to hinder growth. South African inflation data, released during the month, came in slightly below expectations, with both core and headline inflation for August (+4.4% and 7.6%) coming in below the prior month’s levels. Despite an apparently softening inflation environment, the South African Reserve Bank (SARB) followed global central banks with a 0.75% rate hike.

All performance figures in ZAR unless otherwise stated.

The Iza Global Equity Fund declined by -4.15%, while the Iza Global Balanced Fund declined by -4.21% and the Stable Model Portfolio declined by -4.41% (all GBP returns) for August.

Analysing our underlying fund managers, we find that Smithson Investment Trust was the fund’s biggest detractor declining -8.00% for the month. The top 5 detractors of Smithson were Sabre, Simcorp, Rightmove, Domino’s Pizza Enterprises and Temenos. Smithson has exited their position in Wingstop due to valuation concerns. Our funds largest holding Fundsmith, despite its relative defensive properties, ended the month down -4.5%. Fundsmith’s top 5 contributors in the month were Stryker, Pepsico, Paypal, Unilever and IDEXX. The top 5 detractors were Adobe, Estée Lauder, Microsoft, McCormick and Meta Platforms.

We continue our microscopic analysis of all holdings across the equity fund. Our solace lies in that the valuations remain attractive across the portfolio and are therefore maintained. As we continue to actively manage the Iza Global Balanced Fund we have bought a new position in BH Macro. BH Macro is a hedge to equities and bonds and their strongest performance has historically come at periods of market stress. We have also increased our holdings in structured products as given the environment having any kind of protection is a benefit. Looking ahead, Over the next six to 12 months, we expect that the markets will remain under pressure and volatility will remain high. October is historically the month when the downturn in the markets ends and begins. It is the month that starts the most buoyant period for risky assets