UK equities rose, with the FTSE 100 achieving fresh all-time highs. Small and mid-sized companies saw a flurry of new bids, driven by expectations of a potential turning point for domestically focused companies. Despite encouraging inflation trends, the Bank of England maintained its base interest rate at 5.25%, amid concerns about high wage inflation. Prime Minister Rishi Sunak’s call for a general election added to the market’s focus on political developments.

Having suffered a mild recession over the second half of 2023, it was confirmed the UK economy rebounded strongly in the first quarter of 2024, recording GDP growth of 0.7%. However, more recent data revealed growth had stagnated in April, with the three-month unemployment rate (to April) rising to 4.4% as the economy shed 140,000 jobs. Despite slowing UK growth and encouraging inflation trends, the BoE maintained base interest rates at 5.25%, amid concerns that the fall in UK inflation may only be temporary, driven by high wage inflation in services, which was 5.7% in May.

Emerging market equities outperformed their developed counterparts, delivering quarterly returns of 5.1%. Strength in Asian markets, particularly in Taiwan and China, contributed significantly to this performance. Moves by Chinese authorities to support the real estate sector and strong AI-related stock performance in Taiwan helped Asia ex-Japan equities achieve a 7.3% return. Despite lacklustre returns in Latin America, the overall emerging market performance was robust.

South Africa was another top performer, as investors welcomed the results of the country’s general elections which saw the African National Congress Party and Democratic Alliance, along with a number of smaller parties, form a coalition “Government of National Unity”. Meanwhile, markets like Korea and some energy-related markets such as Kuwait, UAE, Colombia, and Saudi Arabia underperformed, with Brazil and Mexico posting the biggest losses in US dollar terms.

The quarter commenced on a disappointing note for global bond markets, spurred by renewed concerns about US inflation causing investors to reassess the timing of interest rate cuts. Later, a more conducive market environment was driven by the emergence of softer labor market conditions and encouraging news on inflation. Political risk drove idiosyncratic weakness across certain emerging markets. Additionally, the announcement of snap parliamentary elections in France instigated localized weakness, whereas the prospect of UK elections was less contentious.

High yield (HY) markets enjoyed another positive quarter, with strong outperformance over both government bonds and investment grade corporates. Global government bond markets diverged during the quarter. Following an initial sharp sell-off in US Treasuries, yields peaked towards the end of April and subsequently trended lower. Central banks were firmly in the spotlight, with the Federal Reserve striking a relatively hawkish tone and the European Central Bank announcing a 25bps cut in June. Meanwhile, the Bank of England’s decision to keep interest rates unchanged was dubbed as “finely balanced”.

March saw the local equity market outperform its major emerging market peers, with the FTSE/JSE Capped SWIX Index delivering 2.9% during the month. This positive performance helped claw back some of the year-to-date losses, although the index remains down 2.3% for 2024 at the end of the first quarter.

Globally, financial markets continued their strong run, seemingly unfazed by persistent inflationary pressures. Major economies displayed more resilience than initially anticipated, with global equities recording their 5th consecutive positive month and their 4th best opening quarter in three decades.

In South Africa, the inflation story was a cause for concern as local inflation data came in higher than expected, with core inflation jumping to 5% year-on-year. This rise, coupled with concerns about the country’s fiscal outlook and upcoming elections, led to a flight of foreign capital from the SA bond market. As a result, SA bonds suffered a second consecutive month of negative returns (-2.0%), with the 10-year yield rising by a significant 61 basis points.

The South African Reserve Bank (SARB) kept the repo rate unchanged at 8.25% in line with expectations. Despite a slight moderation in inflation expectations, the SARB maintained a hawkish stance, citing upside risks and high core inflation. This stance resulted in a revision to the inflation forecast, pushing the expected return to the target range of 4.5% to late 2025. Consequently, the number of projected rate cuts for 2024 was reduced from three to two.

The upcoming elections and the global economic slowdown pose potential challenges for the South African market. However, the recent resilience of the JSE and the potential for further easing in global interest rates later in the year offer reasons for cautious optimism. Investors should monitor inflation developments, policy decisions by the SARB, and global economic trends to make informed investment decisions.

South Africa was another top performer, as investors welcomed the results of the country’s general elections which saw the African National Congress Party and Democratic Alliance, along with a number of smaller parties, form a coalition “Government of National Unity”. Meanwhile, markets like Korea and some energy-related markets such as Kuwait, UAE, Colombia, and Saudi Arabia underperformed, with Brazil and Mexico posting the biggest losses in US dollar terms.

The quarter commenced on a disappointing note for global bond markets, spurred by renewed concerns about US inflation causing investors to reassess the timing of interest rate cuts. Later, a more conducive market environment was driven by the emergence of softer labor market conditions and encouraging news on inflation. Political risk drove idiosyncratic weakness across certain emerging markets. Additionally, the announcement of snap parliamentary elections in France instigated localized weakness, whereas the prospect of UK elections was less contentious.

High yield (HY) markets enjoyed another positive quarter, with strong outperformance over both government bonds and investment grade corporates. Global government bond markets diverged during the quarter. Following an initial sharp sell-off in US Treasuries, yields peaked towards the end of April and subsequently trended lower. Central banks were firmly in the spotlight, with the Federal Reserve striking a relatively hawkish tone and the European Central Bank announcing a 25bps cut in June. Meanwhile, the Bank of England’s decision to keep interest rates unchanged was dubbed as “finely balanced”.

Similarly, in the Iza Global Equity Fund, Dodge & Cox and Berkshire Hathaway were detractors alongside Fundsmith, whose slight negative print for the quarter was disappointing. The performance of Fundsmith further supports our proactive decision last year to meaningfully reduce exposure and rotate into Nomura. Additionally, Smithson lagged in the equity fund due to small and mid-cap headwinds. Small and mid-cap stocks are currently trading at their cheapest relative to large caps in over five decades, indicating potential for a strong recovery when rates come down and sentiment shifts.Despite the recent outperformance in June, the Iza Global Equity Fund remains slightly behind the MSCI World Index year-to-date. This lag is largely due to the high concentration in performance of major indexes, which have seen unprecedented concentration in US large caps. We remain hesitant to chase yesterday’s winners, as we already have more prudent weightings to each, ensuring that the fund’s portfolio remains diversified and resilient. The fund was ahead by 2% for Q2 and 1.5% YTD vs global equity peers (ASISA Global Eq General ).

Both the Iza Global Balanced and Iza Global Equity Funds are wellpositioned to capture positive rotations and the recovery of stocks poised to play catch-up. Their exposure to quality growth managers like T. Rowe Price and Nomura ensures resilience, while the strategic diversification away from Fundsmith and Scottish Mortgage has reduced manager risk. Bonds added upside in the balanced fund, with gold being the biggest contributor, further emphasizing its role as a key diversifier.

The Iza Global Balanced and Iza Global Equity Funds’ strategic positioning allows them to benefit from both large-cap growth stocks and sectors poised for recovery. This ensures that they can continue to deliver strong returns to investors, supported by a prudent blend of growth, quality, and value investments.

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.

Robert Arnott