The first quarter was challenging, with poor returns from domestic assets and global bonds dampening positive returns from global equities.

The quarter saw the risk of a global recession diminishing dramatically, with most leading economic indicators for major economies pointing to a consistent recovery in both the services and manufacturing sectors.

However, this recovery appears to have exacerbated labor market imbalances in developed countries, thereby increasing the upside risks to inflation in those markets and potentially leading to higher interest rates for longer.

On the domestic front, resurging inflation, an unconvincing State of the Nation Address, weak revenue projections by the Minister of Finance during the budget speech, a growing deficit, low commodity prices globally, and weak economic data weighed on sentiment. Inflation moved farther from the central bank’s preferred 4.5% midpoint after rising to 5.6% in February 2024, up from January’s 5.3%, slightly above market forecasts of 5.5%.

This forced the SARB to remain cautious, holding the repo rate steady at 8.25% in the two meetings it held during the first quarter of 2024 and maintaining a somewhat hawkish posture.

Against this backdrop, the All-Share Index shed 2.25%, nominal bonds declined 1.80%, while developed markets equity gained 10.66% in rands. Offshore property and global bonds gave up 0.10% and 0.09% respectively in rand terms. The 27four Stable Fund gained 1.69%, surpassing the low equity portfolio category average by 37 basis points.

This outperformance is attributed to overweight positions in global equities as well as diversification across managers in different asset classes. We maintain our bias towards offshore assets, which we believe are set to benefit from a stronger global economy. However, we are becoming increasingly selective as some offshore equities are starting to look expensive.

On the domestic side, we remain defensive in income, where the resurging inflationary pressures are likely to support yields. Our caution on domestic risk assets emanates from the uncertainties surrounding the outcome of the next election. Recent polls suggest that the ANC is unlikely to secure the needed numbers to form a government on its own, leading to the possibility of a coalition government.

At this point, it is difficult to predict how such a government would be structured. It is our belief that whatever the outcome of this election, it will have a significant impact on the performance of domestic assets. The portfolio remains aligned with its policy objectives.