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Both global and local equity markets ended the month of May with relatively flat returns, subdued by slower global growth prospects and the increasingly negative impact of the ongoing Russia-Ukraine war. While global energy prices continued to rise, other commodity prices were broadly lower, impacted by downward revisions to growth forecasts, especially in China. Locally, softness in Resources and Industrial stocks was offset by SA Financials strength, leaving the FTSE/JSE ALSI with a -0.4% total return but the more domestically-tilted FTSE/JSE Capped SWIX Index with a 0.5% total return. Meanwhile, global and local bond returns were both in slightly positive territory, reflecting the delicate balance between worries over higher inflation and lower growth. Finally, the US dollar weakened against most other currencies, with the rand gaining 1.5% against the greenback. In turn this helped dampen local inflationary pressures.
These asset returns favoured our equity and multi-asset portfolio positioning for the month, thanks largely to our overweights in global cash, SA Financials and SA bonds, and our underweights in gold stocks. Our broad equity diversification also added value.
With US equities becoming cheaper, we took the opportunity to add to our holdings in this asset class in the M&G Balanced and Inflation Plus Funds, as well as in our Global multi-asset funds, out of global cash, moving from an underweight to a neutral position. We are now less overweight in global cash, which has been a relatively unusual stance for us but has reflected the lack of strong valuation signals in other global asset classes for some time now.
We still prefer SA equities and SA nominal bonds over global equities and bonds – read more about this in the accompanying article by our Head of Equity Ross Biggs. However, this doesn’t mean that investors shouldn’t maintain a healthy exposure to offshore assets, which are necessary and valuable components of any portfolio. Our recent webinar with Sandile Malinga explains how we look at adding offshore assets, which you can also view below.
While shorter-term macro conditions do appear to have deteriorated, investors shouldn’t be discouraged: we are holding many high-quality companies with strong cash flows that can outperform the broader market during periods of slower growth. In addition, our equity market has an advantage in its cheaper valuation compared to many other markets, giving it a stronger chance of outperforming going forward. We remain confident that we are well-positioned to outperform our clients’ expectations over the medium term.
Article taken from M&G Monthly (June 2022)