Zwelakhe Mnguni, Chief Investment Officer and Grant Nader, Portfolio Manager at Benguela Global Fund Managers

Global equity markets have witnessed sharp moves over the past week, driven by multiple concerns such as softer economic data in the United States with higher unemployment and lower job creation, softer manufacturing data, and earnings disappointments. The word recession has once again been thrust to the forefront of every market discussion, but caution and context are needed at times like this.

The frothy multiples in certain technology and AI darlings such as Nvidia has no doubt laid the groundwork for the much of this market pullback. The S&P 500 is over 8% below its recent all time high and the technology laden Nasdaq 100 has corrected over 13%. The sell-off has not been restricted to the US with Japan’s Nikkei falling over 12% at the start of this week – the largest such move since 1987 – and the Volatility Index, VIX, a gauge for stock market participants’ expectations of volatility, saw an intraday high of 65, something usually reserved for major crises such as the COVID-19 epidemic or 2008 Global Financial Crisis (GFC).

Such volatility episodes can be exacerbated by hedge funds and derivatives markets, where some players may short specific stocks to capitalize on downside momentum, while others buy puts to minimize potential losses. Nevertheless, we view the current market pullback as a commotion caused by those who borrowed in yen to earn in other currencies (to carry trad) rather than a full-blown rout, now being forced to unwind these positions as the Bank of Japan raises rates and the yen continues to strengthen against the dollar.

For perspective, the S&P 500 had rallied 37.5% since 30 October last year to its recent peak and as much as markets go up over time, they don’t go up in a straight line. Corrections are common but full-blown collapses far less so.

Market collapses rarely follow an inverted L-shape, especially in the absence of a tangible crisis event like a major default or large-scale macroeconomic retrenchments which confirm a slowdown. There is also ample liquidity in financial markets (unlike the GFC), and global economic regions including Europe, China, the US and India are all still exhibiting some levels of economic growth.

Of course, some declines may persist, for instance, optimism around Artificial Intelligence (AI) driven stocks may be recalibrated downward as AI use cases haven’t reached a critical mass to sustain current levels of capital expenditure. The full-scale generative leg of AI could significantly drive demand for AI processing capacity and application development, but we may be two to three years to that level.

While South African markets have not been immune to the selling it has been far more resilient falling only around 3% from recent highs. We believe this is partly due to the rand hedge qualities of the benchmark and partly due to the favourable tailwinds for South Africa’ s economy. The prospect of better governance and service delivery, and end to loadshedding, as well as the start of the rate-cutting cycle allied to still cheap valuations, paint a better picture for South African equities than we have had for many years.

The JSE Top40 has rallied close to 17% since late October 2023, confounding many SA sceptics. For long term investors, healthy market corrections should be viewed as an opportunity to add to high quality businesses that can withstand a deeper economic slowdown if it materializes, but also benefit from what we believe is an improving outlook for the Rainbow Nation.

A famous investor once said, ‘be greedy when others are fearful’, and to this we add ‘especially if you have done your homework’.

ENDS