December 2023 Market Commentary by RISE

Here is a summary of events that unfolded in the markets during December 2023, with insights provided by Duane Gilbert, our Chief Investment Officer.

Global Markets

December was yet another good month for global equity markets, making 2023 a year of exceptional equity returns. Developed market equities ended the month up 5.2%, delivering a one year return of 24.1%. As we discussed in previous commentaries, the over riding bullish theme of 2023 was falling US inflation and the expectations that the US Federal Reserve will be able to cut interest rates “soon”. This theme strengthened in December after another low US inflation print led the Fed to acknowledge that the reversal in inflation trends could spark a resumption in interest rate cuts.

Chart 1: US Inflation close to Fed’s 2% target (Source: Trading Economics)

 Chart 2: US Interest rates still close to 25 year highs (Source: Trading Economics)

 

US tech stocks were the biggest winners for the year with the tech-heavy Nasdaq Composite up 43% in what’s been dubbed the “Chat GPT” rally.  Nvidia led the pack, ending the year up 239%. Nvidia is the world’s leading chipmaker, and the company’s graphics processing units are used to run advanced AI models. It reminds me of a quote from Mark Twain, “During the gold rush it’s a good time to be in the pick and shovel business”. 

Expectations for falling interest rates also boosted small cap growth stocks, as small caps and growth stocks tend to outperform in a falling interest rate environment. The Russel 2000 Growth Index gained 12.0%. Markets are now pricing in 1.5% of rate cuts from the Fed in 2024. 

Chart 3: Market expectations for rate cuts (Source: BCA)

 

Chinese equities were the big disappointment of 2023, down -11.1% YTD in USD. As we discussed in a few of our commentaries over the year, Chinese growth is under pressure as a result of destructive policies targeting the property, technology, private education/healthcare and other sectors, which are aimed at reinforcing the government’s control over the private sector and redistributing wealth. Unfortunately, the opaqueness of Chinese policy and data makes it difficult to assess the true long-term impact of these policies. Fixed income markets were positive, with the Bloomberg Barclays Global Aggregate Bond Index finishing the month up 4.1%, on the back of expectations for rate cuts and tightening credit spreads. 

Chart 4: Global corporate bond spreads lowest since early 2022 (Source: Bloomberg)

 
Local Markets
Local markets took their direction from global markets, with the JSE All Share Index gaining 2.0% in ZAR (up 5.5% from its intra-month low). In fact, we noted a lot of foreign buying in December, suggesting that the positivity that global markets experienced, is finally spilling over into emerging markets. The Financial 15 Index, which is a proxy for SA consumer stocks, ended the month up 5.5%. The Industrial 25 Index ended the month up 0.5%, and the Resource 10 Index ended the month down 1.3%. 

The JSE All Bond Composite gained 1.5% for the month and the composite inflation-linked bond index gained 2.2%. The rand benefited from foreign buying, strengthening from 19.08 to 18.34 during the month. Unfortunately, this rally was cut short after it became international news that the SARB and the National Treasury are considering withdrawing up to half of the SARB’s R497 billion contingency reserves (gold and foreign exchange) to help reduce the government’s debt load and fund public-sector wages.

South African GDP contracted by 0.2% in quarter 3 2023, after 2 quarter of positive growth. Agriculture’s contribution to GDP declined significantly for the period, reflecting the difficulties faced by farmers as a result of logistics constraints and load-shedding.

Chart 5: SA GDP quarter-on-quarter (Source: Trading Economics)

 

Chart 6: Industry contribution to GDP growth (Source STATSSA)

 

Comments from Our Chief Investment Officer, Duane Gilbert

Markets are bullish that the US Federal Reserve will cut interest rates early in 2024, and that a US recession will be avoided.  Valuations are stretched, and markets are priced for perfection. Despite inflation falling rapidly this year, we are of the view that inflation remains sticky at these levels, and that the Fed is unlikely to cut rates any time soon. Market returns are thus asymmetric.

We believe that a US recession is likely to play out in the first half of 2024, even if it is a mild recession. Recession aside, we believe that valuations are too sanguine given the rapid withdrawal of liquidity, low global growth, and high geopolitical risks.

Fundamentally, the market environment remains unsupportive. As a result, we maintain a conservative positioning in our portfolios. Our exposure to global equities is low. Within equities we have taken a more defensive stance, favouring US quality equities and defensive sectors. We have a high allocation to global bonds which provide a strong hedge during a recession. South African equities are particularly cheap but vulnerable to a global sell-off. One needs to carefully pick companies that can grow their earnings in a low growth environment. 

Our portfolios have a high allocation to SA Bonds (where longer-dated instruments are still offering double-digit yields) and exposure to commodity backed loans. We also hold a lot of cash in our portfolios. We prefer USD over ZAR. The weakness we saw in 2023 despite a supportive global backdrop is testament to how fragile the ZAR is. Our large cash position gives us the dry powder we need to take advantage of bargains that may arise from a market sell-off. 

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