OIG Monthly Market Review
Optimum Investment Group enable our clients to have access to a well-versed investment team with extensive experience in both local and global asset management, which allows clients to grow their wealth and meet their investment objectives. This document outlines financial market movements as well as the effects it had on the Optimum Funds.
A more robust Q3 2022 growth outcome, driven by a significant restocking of inventories and strong exports, was expected to lift the headline figure for growth in economy activity for 2022. South Africa recorded a trade surplus of R8 billion in November 2022 – up from a deficit of R5 billion in the prior month. However, global and local headwinds are clouding the outlook for this in 2023. This could lead to less positive employment prospects; negative consumer sentiment; higher food and fuel costs; higher debt service costs for indebted households; and reduced consumer spending.
The SA Reserve Bank's early monetary policy actions have likely reduced the prospect of rising inflation becoming more entrenched in the local economy. South Africa’s annual inflation rate eased further downwards to 7.4% in November of 2022 - the lowest reading since June 2022. The three categories with the highest annual inflation rates in November were transport (+15.3% YoY); food & non-alcoholic beverages (+12.5% YoY); and hotels & restaurants (+7.9% YoY).
Stocks geared towards the domestic economy were December's worst performers (-6% m/m), while businesses making profits abroad outperformed overall, despite a strong local currency (rand +1% MoM vs the US dollar). The most notable positive contributors to local stock indices were Naspers and Prosus, both +7% MoM, boosted by a rebound in the stock price of their biggest investment, Chinese technology conglomerate Tencent.
The ANC had its 55th National Conference at Nasrec in December 2022. The conference was marked by President Cyril Ramaphosa’s battle against the threat of an impeachment vote and the possibility of having to resign due to possible criminal charges related to the theft of - and the consequent handling thereof - foreign currency from his Phala Phala game farm. The president was able to avoid any serious outcomes from this alleged misconduct and was elected for a second five-year term in charge of the ANC. The composition of the ANC's remaining top leadership appeared to support an extension of the investor-friendly policies seen during the president's first term, and local markets responded well to the outcome of the conference.
The 4Q 2022 rally lost momentum leading up to the year-end (MSCI World -4.2% in December). However, global equities were able to deliver its first positive quarter of 2022 (MSCI World +10% QoQ). Unfortunately, this wasn’t sufficient to push global equities back into a bear market for the year (MSCI World -18% YoY). Global markets lost speed in December as the concern of a global recession weighed on stakeholder sentiment. For Q4, developed markets (MSCI All Country World Index) returned +9.4%; marginally outperforming the +9.2% generated by emerging markets (MSCI Emerging Markets Index) over the same period.
This volatility has been driven by Central Banks’ rapid interest rate hikes to control inflation; continuous recession uncertainties; Russia’s war on Ukraine; and increasing fears over an increase in COVID-19 cases in China since the country has opened its borders and removed its strict pandemic protocols and regulations.
The Bloomberg median consensus forecast for last year's growth lowered from 2.5% at the start of last year to 0.3% by December 2022.
Hawkish rhetoric from the US Federal Reserve (FED) has compounded this after the FED implemented its seventh consecutive rate hike of 0.5% on 14 December and echoed its message of ‘higher rates for longer’. Mixed economic data preceded the FED’s last meeting of a busy 2022 as US employment data topped expectations, delivering more jobs and faster wage increases than anticipated. Meanwhile, inflation data showed prices slowing faster than estimated.
The US Dollar Index experienced its worst quarter since the third quarter of 2010 – but it was still its best year since 2015.
US tech stocks struggled, as the tech-heavy Nasdaq 100 Index had a 9% MoM drop, that wiped out all its 4Q 2022 gains, leaving it in bear market territory for 2022 (-32.4% YoY). December marked double digit share price declines for Apple, Amazon and Alphabet. Tesla’s share price was also down by 37% MoM since it has announced production and price cuts in China and massive discounting in the US.
In the UK, financial markets improved after the appointment of Rishi Sunak as Prime Minister, which saw much of the turmoil caused by his predecessor’s proposed economic policies overturned.
The Organisation for Economic Co-operation and Development warned that the UK is on track to become the worst performing country in the G20 composite, apart from Russia, over the next two years. The economy has been forced to undergo a difficult adjustment due to a sharp decline in living standards and strained post-Brexit commercial relations. The Bloomberg median consensus forecast for 2022 has been lowered from an expected 2.2% in January 2022 to a negative 1% in December.
The FTSE-100 Index (+0.9% YoY) was one of the few main indices to experience a positive performance in 2022, but for December, the index was down by 1.6% MoM.
November inflation came in at 10.7% YoY after hitting a 41-year high of 11.1% in October. This could be attributed to lower fuel prices, helping ease price pressures. On the other hand, food and energy prices continued to be high. As anticipated, the Bank of England (BoE) increased interest rates in November by 50 bps to 3.50% – its eighth increase for 2022.
Given their proximity to the Russian-Ukrainian conflict and their reliance on Russian gas imports, countries in the European Union are among those most vulnerable during an energy crisis. Europe’s mild winter has been a helpful blessing for Europeans trying to pay their energy bills, and for the worried policymakers trying to guide the economy. Natural gas prices surged in 2021, and then went extremely high last year as traders anticipated the harm to supply caused by Russia’s invasion of Ukraine, which resulted in economic boycotts against Russia. The negative shock to supply has been followed by a negative shock to demand, as Europeans were using far less heating than expected. This resulted in natural gas prices, dropping by a massive 85% since August. For the time being, the widespread fears of a crippling European energy crisis have yet to happen.
The European Central Bank (ECB) implemented a smaller rate hike at its December meeting, taking its key rate from 1.5% to 2%. Nevertheless, the bank said it would need to continue increasing rates “significantly” to regain control over inflation.
In December Germany’s DAX index ended the month at 3.3% lower (-12.3% for 2022), and the CAC Index of France closed at 3.9% down (-9.5% for 2022).
The Bloomberg median consensus forecast expects a recovery of 4.8% this year, 0.5% weaker than the estimate calculated a year ago. Growth prospects remain to face downside risks because of tighter regulatory policies, negative trade developments with the US and a potentially bumpier than predicted ride in the relaxing of COVID-19 restrictions.
In December, investors welcomed news that the Chinese government would partially relax its COVID restrictions and further reopen the economy. However, a sharp rise in new infections dampened the short-term economic outlook.
Given its delayed recovery from the COVID-19 epidemic, Japan's economy will continue to play catch-up. Although manufacturing and consumer spending will be supported by the government, a more unstable global environment will nonetheless have an impact on economic growth.
The Bloomberg median consensus forecast for growth for last year peaked at 18% in June 2022, but then lowered to 13% by the end of 2022.
Markets were surprised and it was arguably the most noteworthy Central Bank impact for December, when the Bank of Japan widened the range, it will tolerate for the country’s 10-year government bond yields. This shock move led many investors to suggest that it might mark the beginning of the end for excessively cheap funding rates globally and suggesting that the country may pivot towards a tighter monetary policy in 2023. This saw the Japanese yen strengthening by 5.3% MoM against the US dollar and was a catalyst for higher global rates, with the US 10-year bond yield rising by 0.3% to 3.9% by the end of December.
While every care and effort has been taken to ensure the accuracy of the information provided, any information shared in this document does not constitute advice as defined in the Financial Advisory and Intermediary Services Act, 2002. It is your responsibility to get professional advice to accompany you with the information read, that will suite your personal circumstance.