PPSI Investment Perspectives – Equity markets in Q1 2023

After a particularly volatile 2022, global equity markets saw a rebound in the first quarter while local equities delivered more modest returns.

Markets reacted to the growing expectation of interest rate cuts by the US Federal Reserve , only to be scuppered by the heightened banking concerns, first from Silicon Valley Bank in the US and then by Credit Suisse in Europe.

Mixed market outcomes

The local equity market as measured by the FTSE/JSE Capped SWIX was up 2.4% for the quarter even though the index was down 2.0% in March on the back of poor performance by the banking sector. For the quarter there were mixed outcomes among the underlying sectors with resources negative at -4.4%, financials flat at 0.4% and industrials outperforming with a 14.5% return.

On the global side the MSCI All Country World Index was up 11.9% in rands, helped by the 4.3% depreciation of the rand against the dollar. Developed markets (+12.3%) continued to outperform Emerging markets (+8.4%) over the quarter, as has been the case over the past decade.

As inflation moved below peak levels, both global bonds (+7.9% in ZAR) and local nominal bonds (+3.4%) benefitted while local inflation-linked bonds delivered a more modest return (0.9%). Local property (-5.2%) declined in value after a strong rally in the last quarter of 2022 and local cash has become a more compelling opportunity (+1.7%) as short-term interest rates have rose.

PPS Portfolio performance

Tactical asset allocation remained somewhat conservative with the neutral local equity and underweight global equity allocations maintained. South African fiscal concerns as well as the relatively improved cash yield, as interest rates have increased, means that the current overweight domestic bond position is being debated as risks are being weighed. The overall allocation does however remain similar to the long-term strategic levels with an underweight to growth assets, including property, as the likelihood of a US recession remains high.

The PPS portfolios had a good start to the year as global equities in particular, benefitted from the market expectation of rate cuts coming sooner. The PPS Global Equity Fund and PPS Global Balanced

Fund of Funds both delivered first quartile performance for the quarter after relative underperformance in 2022. Even though domestic equities lagged their global counterparts the PPS fund of funds showed an improved level of absolute performance while remaining competitive against peers over all investment horizons. The PPS Partnership funds (PPS Managed, PPS Stable Growth and PPS Defensive) remain among the best performers in their respective categories since inception.

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 the improved diversification.