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PPS Investment Perspectives – The equity markets in Q3 2023

30 October 2023 Luigi Marinus, Portfolio Manager at PPS Investments

Inflation expectations and the effect on interest rates remained the major theme as it has been for the last few quarters.

Global equities had a strong start to the year, benefitting from the market expectation of a reduction in interest rates in the near term as US inflation came off its peak levels and moved sharply closer to the US Federal Reserve (Fed) target level. In the third quarter however, consensus seems to have swayed as inflation started the quarter at 4.1% (May print), went down to 3.0%, and rebounded back to 3.7% by quarter end.

This not only meant that a first rate cut became less likely, but the Fed chairman remained hawkish in his interest rate stance reiterating that the Central Bank would act on inflation expectations and that inflation concerns remained to the upside. Global equities therefore came under pressure with company hurdle rates remaining higher than previously expected and the US 10-year bond yield moving close to the 5% level after yielding only 0.5% as recent as August 2020.

Markets
The change in global sentiment to the direction of inflation and interest rates led to a difficult quarter for growth assets.

South African equities measured by the FTSE/JSE Capped SWIX were down 3.8% for the quarter which resulted in the index delivering a negative return of -0.3% year-to-date. Among the subsectors, only Financials delivered a positive return of 2.0% for the quarter as Industrials (down 6.8%) and Resources (down 5.4%) followed the global trend for the quarter.

The MSCI All Country World Index, which provides an index of developed and developing country performance was down 3.7% for the quarter in rands which includes a 0.3% appreciation of the rand against the US dollar over the period. Developed markets and emerging markets delivered a similar return over the quarter (-3.7% vs -3.2%) as few markets were spared in the downturn in sentiment.

As inflation moved off recent lows during the quarter and the prospect of rate cuts was pushed further into the future, global bond yields rose in sympathy resulting in a 4.5% decline of the FTSE World Government Bond Index. Locally the FTSE/JSE All Bond Index was down 0.3% for the quarter while the

FTSE/JSE Inflation-Linked Bond Index eked out a 0.1% positive return. SA-listed property also declined for the quarter (-1.0%) with local cash delivering the only meaningful positive performance (+2.0%).

Portfolio positioning
The PPS portfolios had a solid quarter amid difficult market conditions. Although the view to be underweight global equities at the start of the year, in hindsight, proved to be about five months premature the overall conservative stance adopted by the funds helped protect capital as market conditions deteriorated.

It has meant that the PPS multi-asset fund of funds have generally outperformed peers for the quarter and year to date. The PPS Partnership funds (PPS Defensive, PPS Stable Growth, and PPS Managed) remain among the best performers in their respective categories over their investment horizons. In the global space, the PPS Global Equity Fund and PPS Global Balanced Fund of Fund both delivered first-quartile performance year-to-date which also mitigated the underweight global exposure, meaning that the fund of funds remained competitive. The higher exposure to both local and global cash added value over the year, particularly in the recent quarter.

As a multi-manager, the manager research component remains the largest driver of PPS portfolio returns and is where most of the internal research effort is directed. Long-lasting relationships with a variety of managers with different philosophies and styles have resulted in the suite of PPS portfolio delivering a competitive return over the long term and generally at a lower level of volatility due to improved diversification.

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