March 2024 Market Commentary by EasyRetire RISE

Our Chief Investment Officer, Duane Gilbert, shares a positive outlook for the market in the first half of 2024, thanks to lower inflation which may lead to interest rate cuts. Despite this optimism, he warns of possible mild recessions in the U.S. and Europe and slow growth in China. Gilbert suggests a cautious investment strategy, focusing on safer U.S. stocks and international bonds. He also talks about keeping a large amount of cash ready to take advantage of any market downturns.

Global Markets
The global equity rally continued in March as financial markets increasingly expect the US to avoid a recession in 2024 (the “soft-landing” scenario). US equities ended the month up 3.18%, European equities up 3.86%, Japanese equities up 3.16% and emerging markets up 2.48%. US and Japanese markets reached new all-time highs in March. What’s more, the positivity in equity markets is finally spilling over into other “risk” assets. Specifically, commodity markets had a good month, with a wide range of hard and soft commodities posting positive returns. The Bloomberg Commodity Index ended the month up 2.68%, posting its biggest return since November 2023. Gold was the strongest performing commodity, up 8.1%, gaining additional support from central bank buying.

Chart 1: S&P 500 reaches new high

Chart 2: Nikkei 225 reaches new highs

Chart 3: Bloomberg commodity index

In contrast, Chinese equities had a bad month in March, down 0.94%. In our February commentary we spoke about how Chinese markets were buoyed by officials, who are now using the country’s sovereign wealth fund to buy shares in an effort to reverse a 3-year-long market sell-off. In addition, authorities introduced new regulations that require major institutional investors to buy more shares than they sell by the close of the trading day. As one would expect, equity prices were supported by this buying, but it did nothing to improve the Chinese economic outlook. Hence the drop in March. Chinese officials remain unwilling to use deficit spending for economic stimulus, which they believe would aggravate the structural imbalances that they are trying to address, and negatively impact long-term growth.

Chart 4: Chinese Growth is below trend and underperforming Asian Peers (Source: Alpine Macro)
 

In contrast to equity markets, bond markets fell as investors continued to rotate out of bonds into equities. The Bloomberg Barclays Global Aggregate Index ended the month up 0.82%. The sell-off in global bonds not only reflects a preference for equities, but also a long-term positive view on the global economy. Since 2014 ultra-low interest rates and economic uncertainty have led to a bizarre situation where some long-dated bonds traded at negative yields. This phenomenon peaked during the covid crisis where yield hit all-time lows and there was a lot of fear around the outlook for the global economy. We have now passed this era of low-interest rates and fear. According to Bloomberg, there are now no longer any bonds that trade at negative yields. 

Chart 5: Market value of bonds with negative yields (Source: Trading Economics)

 
LOCAL MARKETS
Local markets had a good month on the back of the commodity rally, up 3.2%. The Resources 10 Index ended the month up an astonishing 15.4%. The Industrial 25 Index ended the month up 2.9% and the Domestic focused Financials 15 index ended the month down 3.5%. The poor performance of domestic counters highlights how global positivity is not finding its way into emerging markets.

The JSE All Bond Composite lost 1.9% for the month as global sentiment toward South Africa continues to decline. Domestic data continued to disappoint with our Q4 2023 GDP growth coming in at 0.1% and the unemployment rate coming in at 32.1% for Q4 2023. The composite inflation-linked bond index gained 0.3%. The rand gained 1.3% to the dollar and 1.5% to the Euro.

Chart 5: SA Employment Figures continue to disappoint (Source: Stats SA)
 

Commentary by Duane Gilbert, Chief Investment Officer
Our market outlook for HY1 2024 is more bullish than it was in 2023. Falling inflation will give the Federal Reserve scope to cut interest rates, which will be supportive of equity markets (and bond markets to a lesser degree). However, we should not forget that the recent interest rate hiking cycle was the most aggressive in 40 years, at a time where growth was already fragile. It is likely that the US will experience a mild recession by mid-year. A recession is also likely in Europe, and China seems likely to continue on its low-growth trajectory in the absence of a meaningful stimulus package from the government.

As a result, we remain conservatively positioned in our portfolios, but with a tactical overweight to defensive US equities. 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.

Given the continuing decline in investor sentiment towards South Africa, we have further reduced our exposure to South African government bonds, which have been a value trap over the past year. We prefer exposure to high-quality secured credit. 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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