Nedgroup Investments Opportunity Fund: Where to from here?

September 2024 saw 26 global central banks cut rates as they tried to stimulate their economies. This is the largest global stimulus since the pandemic and is at levels close to the Global Financial Crisis (GFC) in 2008.

This pushed markets to new highs, with returns over the 12 months to end September far exceeding their long-term averages, as can be seen in the chart below. But with new highs, comes increased uncertainty and concerns about the way forward.

Of particular concern is the concentrated nature of the US stock market. As of end September, 5 stocks delivered half the performance for the year to date while 66% of stocks performed worse than the benchmark index – other than last year, this was the worst under-performance since 1999. The average dividend yield from the S&P 500 is less than US Treasury bills. In other words, less risky assets yield a higher income than risk assets. This inflection point hasn’t been experienced for over 20 years. 

The conundrum is that if you disinvested out of the S&P 500 twelve months ago, you would’ve lost the opportunity to grow your investment by over 36% in US dollars! Hence, the tactical use of hedges as protection within the Nedgroup Investments Opportunity Fund, where one can still participate in some of the upside without the risk of large capital losses, if, or when, the market turns. But protection has become expensive as market volatility continues to rise, compounded by the upcoming American election which could have a profound impact on global trade, inflation and monetary policy.

On the other side of the world, recent monetary and fiscal measures announced by China have had a stimulating effect on financial and commodity markets. It is the largest stimulus measure since the Covid pandemic to help their ailing property market and boost economic growth. Despite the recent strong rally of the Chinese equity market, counters remain attractive due to strong balance sheets and competitive advantages while trading at (still) attractive valuations. However potential trade wars and geopolitical conflicts add to the uncertainty of investing in this region.

Locally, the Government of National Unity (GNU) continues to take shape, yet skepticism remains especially after the disappointment post-‘Ramaphoria’. There is much that can still go wrong - however, the success of the GNU so far has had a profound influence on business confidence in SA, rising to a 2-year high. With new and more ‘private-sector-friendly’ policies, no load shedding, moderating inflation and monetary relief, the business environment is arguably at its best since the 2008 GFC, with a strong consensus that this will translate into economic growth. Economic growth has a larger impact on small and mid-cap companies, specifically those that are exposed to high growth industries such as discretionary consumer spending, tourism and infrastructure development. The question remains, how much skepticism (or optimism) has been priced into our country risk premia, relative to other markets?

When risks abound, one may be tempted to take profits, move into cash and bury one’s head in the sand until certainty prevails, but inflation will be the slow killer to your hard-earned savings. Hence, the ongoing quest to find inflation beating, real return investments without taking unnecessary risk which could see one lose it all.

One consistent certainty is that markets are cyclical, and we’ve been at similar junctions before. It’s during times of increased uncertainty that diversification and the benefit of multi-asset investing comes to fruition. Multi-asset funds have access to various strategies and asset classes that provide the ability to alter the performance outcome, to your advantage. Regardless of markets reaching unprecedented highs, unforeseen geopolitical events or local economic uncertainty, it’s imperative to build a robust multi-asset portfolio that is diversified across asset classes, geographies and individual securities while seeking higher quality but undervalued stocks with strong balance sheets; and tactically utilising hedges to protect against falling equity markets.