Market Commentary for March 2023
While our regular market commentary is for the month of February, events in early March have subsequently impacted on markets and require some analysis. The big news unnerving markets at the time of writing is the failure of US-based Silicon Valley Bank (SVB), which impacted US175bn in deposits and US$209bn in assets. Two other US banks, Signature Bank and Silvergate Capital, have suffered the same fate. In the case of Silvergate, which was heavily exposed to the crypto sector, it has closed its doors and returned assets to its investors. On a different scale entirely, Credit Suisse has sought and received $54bn in support from the Swiss Central Bank. The reassuring news of this support saw shares in Credit Suisse recover significantly. Depositors in both SVB and Signature Bank will receive all their money back and while the US banking system is coming under increasing scrutiny, Treasury Secretary, Janet Yellen, has assured the investing public that the US banking system is sound and that, “Americans can feel confident that their deposits will be there when they need them”. Indeed, unlike the 2008 crisis, authorities have responded quickly and decisively to this mini-banking collapse, with Yellen commenting, “This week’s actions demonstrate our resolute commitment that depositors’ savings remain safe.”
Market volatility will be the watchword in coming weeks until the banking system has fully stabilised and we maintain a close watching brief on all developments.
World markets presented a mixed bag of performances in February after a good start to 2023, with higher-than-expected US inflation data putting a dampener on hopes that the US Federal Reserve would soon be able to pause its monetary tightening policy and ease rates before year end. Instead. the persistently stubborn high inflation awakened expectations that the Fed would continue to increase rates for some time to come. Additionally, continued concerns around US/Sino relations regarding Russia also added to the negative sentiment.
US equity markets ended the month lower as volatility continued to set the tone. The Dow dropped by 4.2% for the month, the S&P 500 was weaker by 2.6% and the Nasdaq declined by 1.1%, with most large US corporates having reported their fourth quarter 2022 earnings.
Economic data in the US weighed on investor sentiment as both US unemployment and inflation data dampened hopes of early rate cuts. Inflation had slowed again in January, albeit at a slower pace than the market had expected, as CPI came in at 6.4% vs a previous reading of 6.5% and consensus expectations of 6.2%. Core CPI, in a similar vein, slowed down to 5.6% in January vs a previous of 5.7% and consensus of 5.5%.
Existing home sales for January also dropped to their lowest in 12 years, but consumer spending, jumped by 1.8%, its biggest increase since March 202. Exceeding expectations, retail sales jumped by 3% as spending on cars, furniture and clothing took centre stage. Unemployment data indicated that the US created around 500 000 new jobs, a surprise strengthening in activity, which added to the inflation data. As a result, markets have extrapolated this strength and are now pricing in an increase in the Fed benchmark rate to between 5.25% and 5.50% by July 2023, which is an upward adjustment of almost 50 basis points since the start of February 2023.
Unlike their US counterparts, European markets had a positive close to February, with all the major indices closing more than 1% higher.
The UK FTSE 100 ended up by 1.3%, its best February return since 2019, as inflation numbers eased for the third consecutive month coming in at 10.1% vs the December reading of 10.5%. Although this slowdown has eased the pressure on the Bank of England to raise rates, it remains close to the 40-year highs reached at the tail end of 2021. In addition, to mitigate any fallout caused by the Northern Ireland Protocol, the British Prime Minister signed a new trade deal with the EU on February 27th.
The Dax in Germany increased by 1.6%, with inflation continuing to climb (8.7% in January vs a previous of 8.1%) as food and energy prices remained persistently high, as the Russian Ukrainian war grinds on. In a similar vein, the CAC in France closed higher by 2.6%, with inflation numbers also climbing (7.2% in January vs a previous reading of 7.0% in January), with higher food and energy prices sustaining the pressure. Inflation in the Eurozone eased, coming in at 8.6% vs a previous reading of 9.2%
Asian markets also displayed a mixed bag of returns in February, with Chinese investors taking some profits post the relaxation of the government’s onerous Covid restrictions which had boosted the market. The Hang Seng closed the month down by 9.4%, the Shanghai Composite eked out a marginal gain of 0.7%. Chinese economic data recovered in February with official manufacturing PMI at 52.6 vs January’s 50.1, which exceeded the consensus expectation of 50.5. Non-manufacturing PMI, a measure of business sentiment in the construction and services industry, rose to 56.3 from the January number of 54.4. As we reiterate monthly, the 50-point mark separates contraction from expansion.
In Japan, the Nikkei closed the month firmer by 0.4%, as economic data showed the economy had averted entering a recession. The GDP print came in at 0.6%, much less than the consensus of 2.0%, while the inflation rate rose to 4.3% in January vs the December print of 4.0%, impacted by an increase in the prices of raw imported commodities and a weaker yen. Core inflation soared to a 41-year high of 4.2% in January, exceeding the Bank of Japan’s target for nine consecutive months. Rhetoric emanating from the BoJ indicated no immediate revision of its target inflation of 2%, issued in 2013, and that there is no rush to alter its ultra-accommodative monetary policy stance, as a tightening monetary policy could further slow the economy.
The South African Financial Market
The events in early March have also had an impact on the local market and require some analysis. We started 2023 with a rally in developed and emerging markets on the back of expectations that the US Federal Reserve would slow the pace of interest rate hikes, and in early February world markets started to pull back, as data suggested that the US economy was more resilient than expected.
With the news of US banking failures, the SA market, like most other stock markets around the world continued to retreat. What is important to note is that our banks are well capitalised and regulated, but unfortunately not immune to a decline in sentiment and increased volatility.
Market volatility will continue in coming weeks while the banking system stabilises, and we will continue to watch these developments closely. We will include further insights into the developments in our next edition of Wealth Matters.
As with the US markets, the local market experienced a pullback in February, with the All-Share index down by 2.2%. At the time of writing the All-Share index had given back all the gains of 2023 and was flat year to date.
The biggest contributor to the market weakness was the Resources Index, down by 13.2% (BHP Group down by almost 7%, Amplats by 21%, Sasol by 14%, Anglos 14%), followed by the Property sector, down by 0.7%, while Industrials were up 1.7% on the back of decent performances from Richemont (almost 6%), and Financials ending up by 2.5%.
In February Finance Minister, Enoch Godongwana, delivered a benign budget, with the primary fiscal intent unchanged, and the focus on debt stabilisation via fiscal consolidation. The Minister also announced a major debt relief programme for the energy utility Eskom, as rolling blackouts continued to impact and the worsening energy crisis continues to cast a shadow over the country’s growth outlook. This was highlighted by the President declaring the 20-year self-made electricity crisis, a national State of Disaster with immediate effect on 09th February. Adding further grist to the mill, the Financial Action Task Force (FATF) grey-listed South Africa on the 24th of February. This means that we are seen as having compliance issues/shortcomings that are a threat to international financial system stability and constitutes a serious reputational blow. As a result, we are now subject to increased scrutiny and leaving the country open to adverse economic consequences in trade and transactions with other countries.
On the economic front, inflation data (CPI) for January slowed for the third consecutive month to 6.9% vs the December reading of 7.2%, with the main contributors being food, transport, and miscellaneous goods. Food inflation jumped to a 14-year high of 13.4% yoy, while retail sales shrank in December by 0.6% as retailers and consumers grappled with the ongoing rolling blackouts, elevated prices, and the increasing cost of living.
As reported above, South Africa’s Finance Minister, Enoch Godongwana, delivered his annual budget policy statement to parliament on 22nd February 2023. Much of the budget focussed on revisions to outlooks due to the big State-Owned Enterprise (SOE) bailouts announced early in the speech. The main point to ponder from this year’s budget is the major debt relief for ESKOM, amounting to R254 billion. The government opted not to take the debt onto its own balance sheet as initially tabled, but rather to take over all debt servicing cost for the ailing SOE over the next three years. While this has a severe short-term impact on the government’s debt metrics, most rating agencies and investors have been accounting for the ESKOM debt as government debt since the power utility started experiencing severe financial trouble.
The major theme in global markets remains the path of key central banks’ policy stance. With inflation slowing over the past few months, investors were pricing in a less severe rate path, yet these hopes were quashed in February as US inflation was worse than expected and the labour market in the world’s largest economy remained robust. The Fed and ECB did as anticipated in raising their policy rates by 25 basis points (bps) and 50 bps respectively.
The South African money market curve steepened markedly during February. Investors seem to be wary of the assumption that rates will decrease by the first quarter of 2024 as expected a month or so ago. This can be seen by the 3-month Jibar rate decreasing by 2 bps and the 12-month Jibar rate increasing by 32 bps. These rates have increased by 323 bps and 280 bps respectively over the past 12 months given the policy rate increases. The STeFI index (a widely used cash-equivalent benchmark) returned 0.54% for the month.
While published numbers suggest that non-residents sold R78 billion worth of South African Government bonds, this does not account for the maturity of the R2023 on the 28th of February. This will present as a large outflow until we see reinvestment in due course. The short-end of the curve came under pressure during the month, with the R186 and R2030 both recording yield increases of 44 bps, while the longer-end, (while still increasing), saw a much more muted move resulting in bear flattening of the yield curve. The R2048 yield increased by 18 bps. The short end of the curve (1- to 3-years) returned -0.01%, while the long-end (12-years +) returned -0.60%. The All-Bond index came under pressure and returned -0.87%
The South African inflation-linked bond curve flattened slightly during February, with the short-dated I2025 yield increasing by 3.5 bps and the long-end of the curve remaining flat. During the budget statement, the Minister announced that Treasury will be lowering weekly inflation-linked bond issuance over the fiscal year, bringing some support to the asset class. The short-end of the curve long ended 0.49%, while the long-end returned 0.62% for the month of February. The South African inflation linked index (CILI) returned 0.45%.