Sasfin Global Equity Model - Quarterly Review - Q2 2023

Global equities enjoyed another positive quarter as the MSCI All Country World (MSCI ACWI) Index, a broad measure of global equity markets, gained over 6% during the period. The performance is however somewhat misleading in that over half the gain can be attributed to just seven stocks. The magnificent seven, as they are referred to in some circles, includes Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia and Tesla. Given their large weightings, sectors that contain the seven outperformed as evidenced by strong gains from the Information Technology, Consumer Discretionary and Communication Services sectors.

One factor that may be driving demand for these stocks is that markets are anticipating that they will be the “winners” of the artificial intelligence (“AI”) mania that has taken the world by storm. The seven may account for an outsized portion of quarterly gains but there were actually a number of technology stocks that outperformed during the quarter. One could interpret these moves as AI mania spilling over into relatively smaller tech counters or perhaps the market continues to favour “risk-on” assets this year as opposed to 2022 where defensive or “risk-off” assets outperformed. Looking beyond the so-called AI winners, the general performance from the remainder of global stocks was far more muted. Risk-off or defensive sectors such as Consumer Staples, Utilities and Health Care underperformed the broader market as did the Energy and Materials sectors on the back of falling commodity prices.

Markets may be anticipating lower demand for commodities following a weak post-covid recovery in China as well as the possible negative impact of central bank rate hiking on economic growth. Even after Saudi Arabia implemented production cuts, the price of Brent crude still declined 6% during the quarter, closing at $74 a barrel . Industrial metal price declines ranged from high single digits to the high teens and even bullion, which briefly traded above the $2,000/ozt level, ended the quarter lower at $1,912/ozt (-3%). 

From a regional perspective, the positive impact  from the “seven” was even more pronounced in US markets given their relatively larger weightings in major US equity indices. This is evidenced by the above-average returns from the S&P500 (+9%) and the tech-heavy Nasdaq Composite (+13%). US bond yields edged higher during the quarter with the US 10-year climbing 30 basis points to 3.8% and its shorter-term counterpart, the US 2-year, increasing 90 basis points to 4.9%.

US inflation levels continue to cool from the 9% level in June last year but at 4%, inflation still remains relatively high, well above the US Federal Reserve’s (“Fed”) target rate of 2%. While the Fed opted to hold interest rates steady at its most recent meeting in June, commentary from Fed officials suggests that further rate hikes later in the year were still on the cards.

During the quarter, a number central banks in Europe raised their benchmark rates as well as signalled their intent to implement further rate hikes later in the year. In general, European bond yields were also higher at the end of the quarter with the German and UK 10-year benchmark rates closing at 2.4% and 4.4% respectively. While the Dutch AEX, French CAC 40 and German DAX stock indices each returned roughly 3% during the quarter, the same could not be said for the UK’s FTSE 100 Index which ending the quarter roughly flat, weighed down by declines in  global miners and oil majors. Japanese stocks maintained their positive momentum following a call from the Tokyo Stock Exchange earlier this year for companies to achieve sustainable growth and increase corporate value. However, it was a disappointing quarter for Chinese equities. Concerns over a stalling recovery post-covid restrictions, weaker-than-expected consumer spending and industrial production as well as record unemployment among the youth soured investor sentiment towards Chinese equities.

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