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PPS Investment Perspectives – Equity markets in Q1 2024

22 April 2024 Luigi Marinus, Portfolio Manager at PPS Investments

In the first quarter of the year, overall, markets were negatively affected by sticky inflation and the expected delay in the first interest rate cut. However, large cap technology companies continued to drive global returns, as they did in 2023.

From an emerging market perspective, while economic indicators in China appear to be reasonably positive, such as the annual GDP growth rate of 5.2%, business confidence above 50 and consumer confidence at 89.1, this has not translated into strong equity market returns. Global investors have remained overweight developed markets compared to developing markets.

The MSCI All Country World Index, which measures the performance of developed and developing countries, increased by 12.0% in rands during the quarter, despite the rand’s 3.5% depreciation against the US dollar. As was the case for calendar year 2023, developed markets outperformed emerging markets over the quarter (12.7% vs 6.0%), with Chinese equities (the largest component of emerging market returns) continuing to trail developed equities. South African equities, measured by the FTSE/JSE Capped SWIX fell 2.3% for the quarter, with financials (down 7.1%) leading the decline, while both industrials (up 0.9%) and resources (up 0.8%) were modestly positive.

The renewed expectation of a delay in short-term interest rate declines has resulted in muted returns for fixed interest assets both locally and abroad, even at current high yields. South African nominal bonds experienced a 1.8% decline in prices for the quarter while inflation-linked bonds were down 0.4%. Global bonds saw a smaller duration effect resulting in a positive 1.0% return for the quarter. From a fixed interest perspective, local cash was the standout performer at 2.0% for the quarter, continuing to benefit from the extended period of high short-term yields.

How are the portfolios positioned?
Despite the multi-asset funds’ cautiously optimistic asset allocation, the PPS portfolios had a strong quarter, benefitting from the global exposure and a sizable allocation to inflation-linked bonds relative to peers. Throughout the quarter, most funds performed in the first or second quartile. All the Partnership funds outperformed their peer group averages, apart from the PPS Defensive Fund, which had an underweight global equity exposure due to its higher valuation and cautious nature.

Longer term returns continue to be competitive and inflation targets are largely being achieved over investment horizons as the portfolios benefit from the diversification across asset classes. Manager selection remains the emphasis of internal research and this is where most alpha has been generated, with the investment team using a disciplined and consistent process when assessing the large pool of manager options. During the quarter there were significant credit events in the fixed interest space, but the PPS portfolios had zero exposure to this, which is a testament to the considered approach to underlying manager selection.

Looking ahead
As a multi-manager, PPS Investments ensures that the different managers selected across our suite of portfolios use a variety of investment strategies. This results in a diversified outcome without having to forecast what the outcomes of the elections or other economic factors will be.

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