Markets In A Nutshell — For February 2024

Investors showered US stocks with love this Valentine’s month, spurning bonds. The US S&P 500 Index surged 5.2%, closing above the 5,000 level for the first time. The Nasdaq Composite and Dow Jones indices also achieved all-time highs. In contrast, US bonds fell on robust economic data and an uptick in US inflation — which again pushed out expectations for the timing of the US Federal Reserve’s first interest rate cuts.

This theme recurred globally, with MSCI’s index of developed market equities rising 3.8% and global bond markets falling 1.3% last month. European and Japanese bourses also achieved all-time highs in February. Emerging market equities performed well, rising 4.8% after Chinese equities rebounded from a multi-decade trough.

The MSCI China Index gained 8.6% after Chinese economic activity improved over the Lunar New Year holiday and the Chinese government announced some market support measures. The interventions included cuts to the 5-year prime lending rate, curbs on short selling, and stock purchases by state-owned investment firms — none of which was sufficient to ignite a full-blown rally of Chinese equities.

However, nothing compares to the market’s love affair with chipmaker Nvidia — its share price surged 30% in February alone. The stock still trades at a dizzying price-to-earnings ratio of over 70-times earnings, despite its recent earnings beats. In Asia, Taiwan Semiconductor Manufacturing Company — a long-term holding in the Foord global funds — also hit a new all-time high, but trades on a more reasonable valuation.

The Foord global funds produced mixed outcomes last month. The Foord Asia ex-Japan Fund jumped more than 10% in US dollars and outperformed its benchmark, given its overweight position to quality Chinese names — but has some ways to go recoup its 2023 underperformance. The Foord Global Equity Fund gained but could not quite match the exuberant returns of its US tech-heavy benchmark. The conservative, absolute-return Foord International Fund — which pares back risk exposures when the risks of loss rise — was flat, as the US equity hedges worked against returns in the rising market.

Fed Chair Alan Greenspan coined the phrase ‘irrational exuberance’ in 1996. The ill-fated dotcom bubble was then in full swing, with the share prices of tech companies soaring — often on the flimsiest of rationales. While today’s blistering US tech stock rally has superior earnings fundamentals, we could certainly draw parallels. Among them is the glassy-eyed belief that a revolutionary productivity paradigm — currently artificial intelligence — justifies the rally. The market’s concentration alone — with the Magnificent Seven now making up almost a third of the S&P 500 Index — should be enough to give investors pause.

Another red flag is that non-interest bearing assets gold and Bitcoin surged towards their all-time highs (both achieved in early March). Bitcoin is up more than 50% this year alone. It’s quite an indictment that investors prefer to hold the safety of this poorly regulated asset with global interest rates at recent peaks and inflation abating — or is it?

The US economy has been surprisingly resilient despite higher interest rates. Underlying measures of trend inflation are now showing signs of again moving higher. The Fed therefore faces a bumpy road to containing price pressures amidst the backdrop of a tight labour market, with jobless claims remaining low and wage inflation sticky between 4 and 5%. We expect that the market will have to rethink its expectations for six rate cuts this year, while the Fed must constantly weigh up the risk that looser policy could re-ignite price pressures. This may prove detrimental to asset prices, where high valuations mean very little margin of safety for investors.

While the US continues to steam ahead, the post-pandemic picture is still rather grim for most other economies. Germany leapfrogged Japan to become the world’s third-largest economy after Japan unexpectedly slipped into recession. Germany itself is on the brink of recession, while the UK also entered technical recession after recording two successive quarters of economic contraction. Election uncertainty will add to the economic malaise — 76 countries hold elections this year, deciding the fate of 4.4 billion people globally.

Despite all the risks, markets continue to rally exuberantly on hopes for early interest rate cuts. The S&P 500 Index, the Dow Jones Industrial Average, the Nasdaq Composite, Europe’s broad STOXX 600 Index, the Japanese Nikkei as well as gold and Bitcoin all breached their record highs.

This leap year, we don’t think investors should have to rely on a leap of faith to justify the prices they are paying. We believe investors’ faith is better placed in a disciplined, consistent and repeatable strategy that has stood the test of time. Rather than be distracted by misguided faith or misplaced fear, we remain focused on studying fundamentals and paying the right price for future earnings streams.

We cannot control markets, economies or animal spirits. What is within our control is what companies we buy, how much of them we buy and the price we are prepared to pay. As important a decision is what we avoid buying. We continue to fill our portfolios with companies that can cope well with inflationary or recessionary conditions, bought at prices that stack the longer term odds in our investors’ favour. We’re also keeping some powder dry for the opportunities that may arise in the whipsaw of market prices. Above all else, a level-headed and pragmatic approach continues to lead our way.