OIG Monthly Market Review
Markets were off to a strong start in January. Hopefully, the old Wall Street saying "as January goes, so goes the year" holds true in 2023.
The JSE rose alongside global markets (FTSE/JSE Capped SWIX +7% month on month (MoM), primarily because of increased optimism about China's reopening and economic growth prospects. The most direct effect of Chinese optimism was felt by Naspers and Prosus; both up +18% MoM.
Despite a relatively weak month for the US dollar, the SA local currency dropped (-2.1% MoM). In January, the rand was one of three major currencies that declined against the US dollar, with only the Argentine peso faring worse. The impact of severe loadshedding on the domestic economy did not assist sentiment towards the rand.
South African 10-year government bond yields dropped in January, trailing global bond yields and ended the month at 10.3%; 0.5% lower MoM.
Excessive power outages, a lack of railway and port infrastructure, and cost inefficiencies are projected to keep growth at bay in the medium term. The South African Reserve Bank (SARB) has revised its economic growth forecast for this year to a dismal 0.3%. Due to catastrophic energy supply problems, growth is predicted to remain modest at 1% by 2025. The SARB's growth forecast has deteriorated, mostly because of increased loadshedding. It anticipates 250 days of loadshedding this year, 150 the following year, and 100 the year after that. The cost of loadshedding to overall growth per stage, per day has been calculated at between R0 million and R1.2 million for stages 1 and 2, and between R204 million and R899 million for stages 3 to 6. Based on these numbers, the SARB estimates that loadshedding will subtract 2% from this year's predicted growth rate. A worse development trajectory and dwindling confidence are predicted to limit growth in fixed investment, while rising living costs and higher interest rates are expected to impede growth in household consumption this year.
Loadshedding has been a constant concern in SA, with the energy availability factor (EAF) dropping below 50% before recovering marginally. With no solution or answer presented by government, President Cyril Ramaphosa has suggested that a National State of Disaster be declared. An odd alliance arose between opposition politicians and South Africa's largest labour union, Cosatu; both of which threatened with legal action unless the load shedding problem was solved, or a date determined on which it would end. The National Energy Crisis Committee reduced the local content requirement for solar panel materials from 100% to 30%, and other revisions to the 2019 Integrated Resource Plan (IRP) are being considered. So far in 2023, Eskom has implemented rolling power outages every day.
In South Africa, headline Consumer Price Index (CPI) inflation was lower in December, at 7.2% YoY, down from 7.4% in November. This was the second month in a row that inflation had declined. CPI inflation is currently at the lowest level in seven months. Core inflation unexpectedly fell to 4.9% in December, down from 5% in November.
Despite a significantly lower growth projection, the SARB raised interest rates by 25 basis points to 7.25% in order to anchor inflation and halt the cost-of-living crisis.
SA was also caught up in a political tug-of-war between Russia and the US (after back-to-back visits from Russian Foreign Minister Sergey Lavrov and US Treasury Secretary Janet Yellen) and surprised with a combined Russia/China/South Africa naval exercise.
2023 started well for developed market stocks, MSCI World up 7.1% MoM, the first positive start to the year since 2019. The 2022 laggards were the greatest winners, at the beginning of 2023, with tech shares rebounding well from a disastrous 2022. The Nasdaq 100 Index was up by 10.7% MoM after plunging 32.4% YoY in 2022. Some of the mega-cap tech companies NYSE FANG+ Index ended the month up by 18.7% MoM after falling 40% YoY in 2022.
Debt ceiling standoff market conditions have remained encouragingly stable amidst turmoil around the US government’s debt levels, which have effectively reached their statutory limit. Treasury Secretary Janet Yellen informed Congress that her department was resorting to “extraordinary measures” to meet obligations while keeping the debt limit intact. The so-called x-date (when Treasury will default) has been forecast for some time in the third quarter of this year, meaning a couple of standoffs between different arms of the US government are likely. Since 1960, politicians have moved to raise, extend or revise the definition of the debt limit 78 times. The most recent impasse on the issue (in 2011) caused the Standard & Poor (S&P) credit ratings agency to downgrade US debt.
Job cuts in Big Tech set the layoff trend in motion toward the end of last year, and the situation is spreading. In January alone, Amazon announced layoffs of 18 000 workers, Google 12 000 (6% of its global workforce), Crypto.com 1 000 (20% of its workforce), BlackRock 500 (in their first retrenchments since 2019), Goldman Sachs 3 200, Salesforce 8 000 (10% of its workforce) and Coinbase 950 (20% of its workforce), to name a few. While not necessarily a cause for panic in terms of equity returns, the layoffs indicate the start of recessionary dynamics in a labour market once deemed too strong by Federal Reserve (FED) Chair Jerome Powell. The tech sector, the biggest beneficiary of zero interest rates, is suffering most and is leading the retrenchment wave.
With money supply growth about to go negative, following the unprecedented expansion of 2020 and 2021, it was logical to expect liquidity to dry up, but it hasn't happened yet. As shown in the chart below from Bank of America Corp., the cash currently held in money market mutual funds suggests that the FED campaign to date has not dented investors’ ability to buy and take risks if they want to.
In January, the blue-chip FTSE-100 Index in the United Kingdom increased by 4.3% month on month.
The S&P Global/CIPS Flash United Kingdom (UK) Purchasing Managers’ Index (PMI) sank to a two-year low of 47.8 points in January 2023. The survey results indicated that higher interest rates and low consumer confidence were the main culprits behind the sustained downturn in UK business activity. Even after the GfK Consumer Confidence Survey showed an improvement in the last quarter of 2022, the index deteriorated close to an all-time low in January due to continued cost-of-living pressures. The sub-index measuring major purchases suffered its largest monthly decline in January. Similarly, the Credit Conditions Survey pointed to the biggest-ever drop in mortgage demand last quarter.
December inflation was 10.5% year on year, down from 10.7% in November, as fuel, apparel, and leisure prices fell, easing price pressures.
In Europe, Germany's DAX finished the month 8.7% higher, while France's CAC Index concluded the month 9.4% higher. According to Gross Domestic Product (GDP) figures released in January, the eurozone economy increased by 0.1% year on year in 4Q22.
The tone at the World Economic Forum improved for the eurozone outlook. The threat of a deeper energy crisis retreated on warmer weather conditions, resulting in weaker demand. European natural gas prices dropped to levels last seen before the Russian invasion of Ukraine, allowing for more gas to be directed to Europe’s storage facilities. According to Gas Infrastructure Europe, gas storage levels are at 76% of capacity, on average, across the European Union. Nonetheless, restocking gas supplies for next year may prove more challenging in light of lower gas volumes supplied from Russia and more intense competition for liquified natural gas from China as its growth rate recovers. While a better outcome on energy rationing could take the sting out of the more pessimistic growth views on the eurozone, the consensus expectation for further interest rate tightening to 3.5% could still damage growth prospects.
A rapid unwind in pandemic controls has led to a surge in COVID-19 infections. According to the Financial Times, a top government epidemiologist confirmed that 80% of China’s population had already been infected. Consequently, the risk of a large country-wide rebound in infections in the coming months is deemed to be relatively low. That said, the annual migration of urban workers to rural areas poses a risk, given the low rate of vaccination and a lack of access to pharmaceutical products. The reopening of the Chinese economy could boost growth in regions such as Southeast Asia, where exposure to Chinese tourism is the highest. Although the recovery is likely to be centred around services, the demand for goods may improve as well, allowing for a boost to exports from commodity-oriented exporters of energy and metals.
For the third month in a row, emerging market (EM) stocks beat their developed market (DM) counterparts with the MSCI EM +7.9% MoM. This was mostly due to Chinese stocks, which continue to profit from confidence about the world's second-largest economy's prospects as economic activity begins to normalise from a low base as the country exits its zero-COVID limitations. As a result, foreign-listed Chinese stocks were among the top EM winners in January, with the Nasdaq Golden Dragon Index of US-listed Chinese stocks up by 18% MoM in January.
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