Building on their continued strong recovery in the first quarter of 2023, global equities maintained their momentum in the second quarter. The MSCI World Index climbed 7%, the S&P 500 was up 8.74% and the Nasdaq 100 rose 15.16% for the quarter – bringing total gains for first half of 2023 to 15.43% for the MSCI World Index, 16.9% for the S&P 500 and 38% for the Nasdaq 100.
Part of the reason that markets have rallied so strongly this year is due to a growing sense among investors that inflation is stabilising and that the end of the interest rate tightening cycle is in sight. Markets took hope from resilient corporate earnings, a fall in US inflation to 4% year-on-year, and the Fed taking a breather in June from interest rate hikes. The resolution to the US debt ceiling stand-off early in the month also helped to maintain confidence.
In addition, this year is a redemption arc for the Big Tech stocks that dragged markets down in 2022 – particularly, the so-called magnificent seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). This group of stocks is riding high amid growing investor excitement about artificial intelligence (AI) – a topic we explore in more detail in one of our articles.
Following a buoyant first half, markets may not run as high or as hard in the second half. The Fed has indicated that there may be two more interest rate hikes to come this year amid core inflation that remains a little sticky. However, resilient corporate earnings and strong employment numbers indicate that the US economy remains robust and that equities may stay strong and even rise, albeit at a slower pace.
There are, as always, geopolitical risks that cloud the picture. The war in Ukraine is unlikely to end soon and the ultimate outcome remains unpredictable. Political noise is likely to get louder in the run-up to general elections in the US, the UK and Russia in 2024. With Donald Trump getting indicted during this quarter and campaigning starting for presidential primaries, the US presidential race will be particularly heated.
Our quality global funds were up 4-5% in dollars for the quarter and 11-13.5% for the year-to-date. Our strategy of index inclusion in our global portfolios has allowed us to benefit from Big Tech gains, while investing in quality companies across different sectors that can grow regardless of economic conditions gives our clients a good balance between capturing growth and hedging against the geopolitical and economic uncertainties.
South African markets held down by political risk
In contrast to global markets, South African equities and the rand fared poorly in the second quarter. The ALSI was flat in rand terms and down 5.52% in US dollars. For the year-to-date, the ALSI was up 5.86% in rands and down 4.5% in US dollars. While the rand recovered from an all-time low of R19.92 to the dollar on 1 June, it ended the quarter 5.8% weaker at R18.83/$, representing a 10.7% depreciation for the first half of 2023.
Noteworthy is that this currency weakness occurred in a period where other emerging market currencies were essentially flat against the US dollar. The reason for the rand’s underperformance was therefore solely attributed to South African-specific factors, as witnessed on 11 May when the rand tumbled following US ambassador, Reuben Brigety, having accused South Africa of supplying arms to Russia during the December 2022 docking of the Lady R. The rand hasn’t completely recovered to pre-incident levels, and the fallout is still putting an unwelcome spotlight on local political risks.
With the government pushing through populist legislation such as the Employment Equity Amendment Act, the National Health Insurance (NHI) Bill and the National Water Act, these risks remain elevated. They are compounded by the attention the deputy president has attracted for his lifestyle and alleged ties with State Capture figures, and by politicking for national and provincial elections in 2024. Furthermore, Eskom load shedding, albeit currently at lower levels, remains a drag on the economy.
South Africa’s foreign policy has added a new dimension to all the existing political risks. With the BRICS summit scheduled for August, investors are frequently reminded of the government’s so-called non-aligned stance on Russia. Although Russia’s President Putin won’t necessarily attend the Summit, the ongoing debate around the issue is doing enough damage.
Our models indicate that, at R19.09/$ as at the time of writing, the rand is currently trading at a discount of 10% to our fair value of R17.28/$. We are thus reluctant to externalise significant percentages of clients’ wealth at these levels and prefer a phase-in approach for those clients who are particularly anxious. However, given the political factors in play, we would see any periods of rand strength to anywhere close to fair value as an opportunity to externalise funds. Our offshore bias is, as always, not just about a rand or South African story, but also about the more attractive set of investment opportunities available offshore.
