Global financial markets performed well in June 2023 as the disinflation trend continued in many parts of the globe due to the easing of food and commodity prices. Furthermore, market sentiment was supported by the optimism of central banks nearing the end of their monetary policy tightening campaigns and the news that the US has reached an agreement to raise the debt ceiling, thereby avoiding default. If you judged by headlines alone, 2023 might have felt as sobering as 2022: four U.S. banks fell, alongside one in Europe; there was much angst about debt ceiling drama; anxiety spiked around geopolitical uncertainty; and central banks have signaled there’s more work to do to win the fight against inflation. And yet, the S&P 500 is up +16,89% so far this year. That marks the fourth-best first half in the last 25 years. The S&P 500 gained 6.61% (USD) in June. S&P 500 breadth turned strongly positive in June, as 454 issues were up (with 155 up at least 10%), compared with May’s 124 gainers, which has turned the YTD breadth positive, with 300 up (116 up at least 20%), as all 11 sectors were positive for the month. The dominance of the high-market-value stocks still exists, as the index’s total return was up 16.89% (USD) YTD, but without the top 44 stocks, the index would be negative YTD. The positive contributions were broad for June, even though they remain highly concentrated YTD. The index is still top heavy, with the top 10 issues accounting for 30.5% of the market value (below 20% is more typical).
The market’s advance came amid moderating inflation and signs that the US economy remains resilient in spite of higher interest rates. The Federal Reserve (Fed) raised interest rates by 25 basis points (bps) in May. However, it did not hike rates in June, adopting what economists have termed a “hawkish pause”. The “dot plot” of rate predictions indicated two further rate rises in 2023. Markets are locking in a rate hike at the upcoming July meeting with 40% odds for an additional quarter-point hike to follow. US inflation (as measured by CPI) declined to 0.1% (month-on-month) in May, easing from a 0.4% increase in April amid a continued decline in the cost of energy. This brought down the annual rate to 4.0%, below expectations of 4.1%.
US Q1 GDP was revised notably higher to 2% from 1.3%, reflecting upward revisions to exports and consumer spending. Consumer confidence increased to its highest level since the start of 2022, which could be attributed to the resilient labor market and softening inflation. The unemployment rate (May) remains near generational lows, and the latest reading showed increasing residential construction payrolls. Inflation is softening, as evidenced by core CPI and PPI; however, the Fed’s preferred measure, core PCE, has remained elevated.
Markets are seemingly pricing in a more optimistic economic outlook than what many media and market pundits have been reporting and forecasting. Record index performance, improving market breadth, new highs in industrials and homebuilders, resilient economic data, softening inflation, improving 2H corporate earnings, and an AI revolution may combined suggest that one of the most widely anticipated recessions may not be in the cards this year after all. Consumer confidence increased to its highest level since the start of 2022, which could be attributed to the resilient labour market and softening inflation. Overall, the US economy more broadly remains in good health.
UK equities fell over the quarter. The large UK-quoted diversified energy and basic materials groups were the most significant detractors amid broad-based weakness in commodity prices and concerns over the outlook for the Chinese economy. A number of domestically focused areas of the market also underperformed as the Bank of England (BoE) raised rates twice – in May and June. The 0.5 percentage points (pp) increase in June represented a reacceleration in rate hikes after an initial decision to slow the pace in March to 0.25 pp increments.
South African equities followed a global trend in June 2023 due to improved global risk sentiment and the easing of power cuts in recent weeks. The JSE All Share Index recorded 1.3% in June 2023 and is up 5.9% YTD. The FTSE/JSE Capped SWIX gained 3.8% in June. This was mainly due to the change in the power utility’s management structure. Over the short term, the JSE ALSI soared to double-digit returns due to reduced tensions between South Africa and the West in respect to Russian relations. Local markets were supported by the financial and industrial sectors, while resources detracted due to China’s bumpy economic recovery. South African bonds outperformed South African equities, with the All-Bond Index (ALBI) rebounding by 4.6% in June 2023. South Africa’s latest inflation data for May fell for the second consecutive month (6.3% YoY), coming in below expectations, while the core inflation basket (5.2% YoY) also saw price gains slow slightly. Inflation remains above the South African Reserve Bank’s 4.5% target, and investors anticipate that the SARB will need to increase rates by 0.50% over the next few months as it continues to fight inflation. The rand rallied by 4.4% relative to the USD in June 2023. SA’s 10-year government bond yield fell by 0.7% during June, leaving it at 11.8% at the end of June.
All performance figures in ZAR unless otherwise stated.
Quote from Alpine Macro
Although Fed policymakers want to stay hawkish, financial markets know that the economy is approaching, not receding from, the final return to price stability. So long as the Fed does not take a dogmatic view, persistent disinflation should be good enough to sustain the rally in both stocks and bonds, because the risk of open-ended monetary tightening is largely off the table. We remain bullish on both stocks and bonds, even though asset prices are off their lows
The Iza Portfolios
The Iza Global Equity Fund rose by 1,30% (GBP) & 3,43% (USD) in June. While the Iza Global Balanced Fund gained 0,75% (GBP) & 2,85% (USD) for the month. The Stable Model Portfolio gained -0,01% (GBP) for the month.
As we continue to evaluate and monitor the risks in our portfolio, we have made a few changes over the past few months. These changes have been made in order to mitigate risk, improve diversification, and align our portfolio with our investment strategy. We have started a new position in the Nomura Global High Conviction Fund. We are selling a portion of the Fundsmith Equity Fund to introduce Nomura. The reasoning behind this is to mitigate and limit the risk of having a substantial weighting to one manager. We will be reducing our weighting in the Scottish Mortgage Investment Trust and introducing the T.Rowe Global Focused Growth Equity Fund and the MSCI World ETF. The rationale in reducing Scottish Mortgage is to diversify our exposure to growth stocks and increase our beta to the market. We have also increased our weighting in the Rubrics Enhanced Yield Fund. We believe that interest rates are nearing the end of their upward cycle, and we see the potential for attractive returns from this allocation. We are selling our entire holding in Liontrust as we believe that Liontrust’s investment strategy is no longer aligned with our own. The proceeds from the sale will be allocated to T.Rowe and the MSCI World ETF. In the past months we have introducd a position in Berkshire Hathaway and Dodge & Cox. These additions have added great value to our fund as they were the top contributors in June. We have sold out of BH Macro. The timing of the sale was on our side as it declined by 9,70% over the last month. The changes to our portfolios will be implemented gradually to mitigate risk. Looking ahead we continue to believe in the long-term investment strategies of Fundsmith and Scottish Mortgage Investment Trust, and we believe that these investments will outperform over the long term and continue to add great value to our portfolios.
Funds’ Performance Summary
The chart below shows the S&P 500 index level from January 2023 to June 2023, with annotated events along the way (that slot into Economy, Politics & Geopolitics, Nature, Culture & Technology, and Markets).There may yet be challenges ahead, but signs continue to point to a still-resilient economy, and gains this strong tend to signal the bear market is over. In the 21 other instances since 1950 that the S&P 500 has been up at least 10% or more in the first half, it’s rallied further in the second half 17 of those times, with the full year up on average +25%.
Source: J.P Morgan
The S&P 500’s performance in the first half of 2023 was its best since 2000, and similarly was led by the index’s top technology companies. The top contributor this year, Apple, closed last week with a market cap of $3tn, which exceeds the aggregate market cap of the entire Russell 2000. A valuation rerating in tech has pulled the index higher, though analysts believe key technologies like generative AI could contribute to an earnings catch-up.
Source: Goldman Sachs