Published Date: 01/31/2024
Source: PPS Investments Group

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Financial markets had a strong final quarter of 2023, driven by optimism that steadily

declining inflation meant the interest rate cycle had most likely peaked. US Federal

Reserve rhetoric in December cemented this belief, with the “dovish pivot” further

supporting interest-sensitive assets.

Financial markets were propped up by better-than-expected global macroeconomic data

this year, most notably growth and inflation.

The South African equity market (FTSE/JSE Capped SWIX TR) spent most of 2023 inside

January’s trading range, eventually ending the year up 7.9%. The Index was held up by

Financials and Industrials (up 21.8% and 17.3%, respectively) but Resources fell sharply

(down 15.4%) as platinum shares and Sasol came under pressure.

The SA market’s entire return for the year was achieved in the fourth quarter (up 8.2%),

with banking and gold shares extending their rallies. Although SA bonds (FTSE/JSE All Bond

Index TR) delivered a similar return to equities this quarter (up 8.1%) they outperformed

for the full year (up 9.7% vs 7.9%), despite higher interest rates.

Foreign equity (up 7.8% for the quarter) had a stellar year, with the MSCI ACWI TR

climbing 31.3% in rands, boosted by the stronger dollar (7.5% appreciation against the

rand). US equities were the main driver, fueled by technology stocks. Foreign bonds

continued their recovery this quarter (up 4.9%), following the protracted sell-off in US

Treasuries to 2007 levels, with the FTSE World Government Bond Index eventually ending

the year up 13.1% in rands.

Portfolios positioning

We remained somewhat cautious in 2023, visible through our slight underweight

positioning in foreign equity for most of the year. Our main concern was the rapid ascent

of interest rates from ultra-low to pre-GFC levels, which we believe presented skewed

downside potential for both the economy and equity markets. In the past, acute tightness

has almost always led to some degree of economic weakness or a serious financial

accident of some sort but, so far, this time has been different.

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We still see the potential for a near-term soft patch in US

growth, though the timing is unclear. Irrespective, with rate cuts on the horizon, we are

more comfortable that the odds of a serious downturn have lessened, and that any

weakness would be relatively minor. We therefore increased the foreign equity allocation

across portfolios during the fourth quarter. We are currently neutral on foreign and local

equity in our tactical asset allocation house view while acknowledging that valuations in

SA are more favourable than offshore.

Most of our underlying SA equity managers unfortunately lagged the market in 2023,

impacted by stock selection within the banks and resources sectors. The intentional high-

conviction construction of PPS Equity means near-term underperformance is inevitable

from time to time, but we believe is an essential element of positioning for meaningful

long-term outperformance. This quarter we introduced a fourth manager, 36One, into the

local equity strategy, enhancing the underlying manager mix.

Outside of equity, we also upweighted foreign bonds during the quarter, as the 10-year US

treasury yield topped 5%. Bonds have endured a historic sell-off to 2007 levels and after

not owning direct exposure in portfolios for many years, we are now overweight in relevant

portfolios. The opportunity set has broadened with rates and bond yields now higher. As a

result, portfolios are now more diversified than in previous years, and managers have

more choice in general.

We remain neutral on SA bonds, having downgraded the asset class late in April, on fiscal

risk concerns. Subsequently, the “Lady R” saga brought about unwelcome volatility during

implementation, while bonds have since strengthened.