Commentary for the quarter ended 30 September 2023
Market Performance review
Despite a strong performance in 2023, risky assets came under pressure during the third quarter of the year. Emerging and developed market equities were respectively down -2.8% and -3.4% (in USD terms) as higher interest rates and geopolitical dynamics stalled an otherwise strong year for global equity returns. Global bonds too had a difficult quarter, with the Global Aggregate Bond Index falling by -3.6%, while commodities performed well and were a strong outperformers returning +4.7%.
The JSE Capped Swix Index was down -3.8% (in Rand terms; -4.7% in US Dollars) during the quarter and -0.3% year-to-date (-10.3% in US Dollars). In Dollar terms the local equity market is the second worst performing emerging equity market this year. Despite a relatively positive performance from SA financials (+1.7%) lead by broadly positive results from both insurers and banks, the local industrial index and resources fell -6.2% and -4.3% respectively. The local market benefitted somewhat from improved loadshedding management versus prior quarters, but this was eclipsed by tough macro data out of China which had a severe impact on various local sectors such as personal goods (Richemont), precious and diversified miners and Technology (Naspers/Prosus).
Fund’s quarterly performance
The Northstar BCI Equity fund was down -1.6% during the quarter, well ahead of the JSE Capped Swix (-3.8%) and the (ASISA) South African Equity General Peer Average which returned -2.6%. Whilst the fund’s quarterly numbers were negative, the performance showed resilience against its benchmark due to both positive sector allocation and stock selection effects. The fund benefitted from an overweight position to financials (banks and insurers) and consumer staples which performed well ahead of the market. While broadly also benefitting from an underweight position to resources, the low exposure to energy stocks, which rebounded strongly during the quarter, detracted from performance. From a stock specific perspective, the largest attributors included conviction calls in Absa (+8.2%), Sanlam (+12.5%), Outsurance (+25.8%) and a large underweight position in Richemont (-25.4%). Main detractors included Exxaro, Glencore and Sibanye Stillwater.
Positioning and expectations
High levels of volatility during the quarter afforded us the opportunity to buy various out of favour stocks. Most significantly we decided to take some profits from some of our financial positions and rotated them into attractively priced diversified miners and gold stock, which had sold off significantly over the past months. Another out favour area of the market, which we added to and believe will perform well over the medium term is the healthcare sector, with hospital stock now trading at unjustified extreme valuation discounts.
Overall the fund remains defensively positioned despite having increased its cyclical exposure, in the form of resources and a larger proportion of local industrials. We remain cautious of the macro environment, as the impact of interest rate hikes is being progressively felt globally, but note that valuations are becoming increasingly supportive and many attractive opportunities are starting to emerge.