OIG Monthly Market Review

Local

In South Africa the FTSE/JSE Capped SWIX All Share ended March in the red, with a decline of 2.1% month-on month (MoM) and 1.9% MoM respectively. Financial stocks were the main negative performer in March, with the Fini-15 6.4% MoM lower, as JSE-listed banking companies felt the volatility caused by the American banking mini-crisis and the problems with Credit Suisse.

The rand strengthened by 3.2% MoM against the US dollar, with most of the positive performance after the SA Reserve Bank’s (SARB) increase in interest rates.

The worst-performing share in March was Transaction Capital, which fell by 59.1% MoM, because of its exposure to SA's struggling taxi business. The crisis was severely impacted by high loan rates, load shedding, and high fuel prices. In a trading update, the company painted a worrying picture of its SA Taxi division, highlighting issues with its taxi finance business and used vehicle operation. The Group also stated that SA Taxi would likely need to undergo restructuring in the short to medium term as it was unlikely that business would return to its pre-COVID-19 levels.

With a 45.0% decline, Steinhoff was the second-worst-performing stock in March. The share dropped by as much as 25% on 29 March, after the news that Steinhoff will ask its creditors to accept a restructuring plan that leaves shareholders with nothing.

Headline inflation data, measured by the Consumer Price Index (CPI), increased slightly for the first time in four months to 7.0% in February from 6.9% in January MoM. In February CPI increased to 0.7%; the biggest monthly rise since July 2022. Food inflation rose to 13.6% year-on-year (YoY) to the highest level since April 2009.

South Africa's Gross Domestic Product (GDP) contracted by 1.3% in Q4-2022 after recovering to an upwardly revised increase of 1.8% in Q3-2022. This was the sharpest drop since Q3 2021, following a significant spike in load shedding towards the end of 2022. In an unexpectedly hawkish move, the SARB raised its rate by 50 basis points on 30 March, raising its repo rate to 7.75%.

Global

Most international markets saw positive results for March and the first quarter, with the Morgan Stanley Capital International (MSCI) Index up 3.2% MoM and 7.9% for 1Q23/YTD. Despite a cryptocurrency meltdown; a mini crisis in the banking sector; and ongoing worries that increased interest rates may lead to a worldwide recession, the global markets demonstrated resilience.

United States (US)

Notwithstanding the challenges, US equities markets (rose, with all three major indices closing another turbulent month on a positive note. The Nasdaq, which is heavily weighted toward technology, outperformed and ended March 6.7% higher and 16.8% up for the first quarter of 2023, its highest quarterly gain since 4Q20. The Dow increased by 1.9% MoM, while the S&P 500 increased by 3.5% for the month.

US two-year Treasury Yields reported the sharpest decline since the early1980s: from above 5% to below 4%, causing the dollar to tumble.

Banking crisis

In mid-March, the failure of a group of mid- and small-cap US banks caused the first banking crisis since the global financial crisis (GFC) of 2008, sending markets teetering.

The first shock was the collapse and seizure of Silicon Valley Bank (SVB) on 10 March 2023. SVB was established in 1983, and by the end of 2022 it had a 40-year history. It was regarded as the 16th-largest bank in the US, with over $200 billion in assets and $340 billion in client funds. Its main focus was financial assistance to fast-growing startups, particularly those in the technology and healthcare industries. SVB was the banking partner to nearly half of the US venture technology start-up companies, The bank’s clients include household names like Shopify and Pinterest. With Signature Bank’s essentially simultaneous closure on 13 March, the US experienced its second- and third-largest bank failures within a matter of days.

Silvergate Bank, another bank with a key focus on the crypto industry, has since announced its closure, largely because the collapse of FTX.com, leading to a devastating deposit run on the bank. In the span of a single week, three regional banks (Silvergate, Silicon Valley and Signature) failed.

Credit Suisse, the second-largest bank in Switzerland, also experienced a renewed loss of confidence due to a series of lapses in risk controls. Yet, by the end of the month, most global markets appeared to have largely recovered from the mini-banking crisis as equities picked up losses with a particularly impressive performance by US technology stocks boosting the broader US market.

The US Federal Reserve (Fed) increased interest rates by 0.25% in March. Fed Chairman Jerome Powell stressed that the US economy still has a long way to go, and the ride is likely to be bumpy, to get US inflation back to 2%. He explained that the Fed is unsure how the current turmoil at regional banks will affect the economy, saying that the US banking system remains healthy and that the Fed will provide additional liquidity to the banking system.

On the economic data front, US inflation data was generally in line with what was anticipated, with annual headline Consumer Price Index (CPI) falling from 6.4% in January to 6.0% in February. February’s 6.0% CPI reading was the 8th consecutive decline in the YoY rate of inflation and the lowest level since September 2021. The annual core CPI, which excludes the unpredictable food and energy components, also tumbled; decreasing from 5.6% YoY in January to 5.5% YoY in February. At a headline level, January retail sales got off to a strong start in 2023, up about 3.0% MoM. Nonetheless, February retail sales fell sharply by -0.4% MoM.

Most of the major CPI categories have reported noteworthy improvement after the inflation peak last June with Shelter being the prominent exception. Shelter CPI increased to 8.1% in February; the highest rate of housing inflation experienced/reported since 1982. Shelter CPI is a lagging indicator. With actual rents and home prices moving down, it’s only a matter of time before Shelter CPI stops increasing. As it is more than a third of the index (34%), when it does stabalise and go down it will have a major impact on overall CPI.

United Kingdom (UK)

In the UK, the FTSE-100 Index tumbled after two straight months of gains, ending March 3.1% lower.

After slowing down for three straight months, UK inflation unexpectedly increased by10.4% YoY in February as the cost of food and energy continued to rise, putting more strain on households. The Bank of England (BoE) raised interest rates from 4% to 4.25% in response to higher-than-anticipated inflation data.

Prime Minister Rishi Sunak’s deal with the European Union (EU) to reexamine the Northern Ireland (NI) protocol received a lion's share backing of 515 votes to 29 in parliament. The agreement addresses the shortcomings of the NI protocol, like issues surrounding merchandise movements and the retail of agriculture and food items and medicine. By streamlining customs regulations and checks for goods entering NI, exchanging costs will likely be lower. Britain accounts for 65% of NI’s merchandise, leaving NI defenseless against exchange stuns.

Europe

Inflation in the euro region was 8.5% YoY in February as opposed to 8.6% in January. Germany’s inflation rate continued to be high in February, at 8.7% YoY (non-harmonised), unchanged from January. The high German inflation was largely due to increases in food and energy prices, reflecting an increase of 21.8% and 19.1% YoY, respectively.

In line with market predictions, the European Central Bank (ECB) increased interest rates in March by 0.5%, bringing the main deposit rate to 3%.

Following the volatility in global banking stocks after the SVB collapse, the chairman of the Saudi National Bank, a main stakeholder of Credit Suisse, ruled out giving any additional funding for Credit Suisse as it battles to implement its turnaround plan. Nevertheless, Credit Suisse has confirmed that it will borrow up to CHF 50 billion from the Swiss National Bank under a covered loan facility and a short-term liquidity arrangement. UBS then agreed to buy the indebted Credit Suisse for £3.25 billion.

Japan

Japan’s benchmark Nikkei increased by 2.2% in March, and 7.5% for 1Q23/YTD.

Newly nominated central bank governor, Ueda Kazuo, has the difficult job of convincing markets that the Bank of Japan (BoJ) can keep inflation under control. The annual CPI decreased to 3.3% YoY in February, marking the lowest level since September 2022, from a 41-year high of 4.3% in January. Transportation expenses climbed at their slowest rate in about five months. For the first time since May, the cost of fuel, electricity, and water decreased. As a result, core inflation decreased significantly to 3.1% YoY from 4.2% in January, but it continued to be above the BoJ’s target of 2% for an eleventh consecutive month.

China

China's consumption accounts for only 50% of China's Gross Domestic Product (GDP), compared to the 70% of the US, increasing the fear that China’s recovery will not be sufficient to offset the global macro effect of a US slowdown. However, before Covid, China had surpassed the US as the world’s largest purchaser and consumer (as measured by dollar retail sales). Severe Chinese lockdowns caused Chinese consumption to decrease, in contrast to the US, where huge monetary backing pushed consumption above trend.

This divergence is likely to be reversed as China resumes economic activity and the US normalises its monetary situation. As US interest rates increase and Chinese consumption picks up, China could once again become home to the world's largest consumer base. Chinese data confirms a rebound in household spending in the first two months of 2023, with January and her February retail sales up by 3.5% YoY.

On 5 March China's annual National People's Congress opened with outgoing Premier Li Keqiang announcing a target of 5% GDP growth this year. This is the lowest target in more than thirty years, as the focus moves to economic stability. While the target of 5% is below the consensus estimate of 5.3%, the projected total deficit in 2023 is about 7.5% of GDP, higher than the actual 5.9% observed in recovery GDP in 2022. More local government fund spending and strong public expenditure should back a recovery in GDP. In addition to strong spending, the People’s Bank of China has further reduced the reserve ratio requirement by 25 basis points. The annual National Assembly closed with President Xi Jinping locking in an unprecedented third term. In his speech, the president concentrated on security due to weakening relationships with the US. But along with this, newly selected Premier Li Qiang advised that not many would benefit from separation from the US, saying, China and the US can and must work together. Premier Li reassured investors at a press conference of Beijing’s pro-business stance, supported by the promotion of private entrepreneurship, a pledge to following international business rules and avoiding contractionary effects from regulatory changes.

DISCLAIMER

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 suit your personal circumstances.