By all accounts, 2022 was one of the toughest years in global markets since the global financial crisis in 2008 with challenges such as elevated inflation, rising interest rates, and slowing global growth. This also marks the worst year for global bonds in over a century.
2022 also confirmed that investing is not easy, with formally admired technology stocks and crypto exchanges plummeting and the old hated (by greenies) energy stocks were the only ones offering positive returns over the 12-month period.
See attached just how bad global returns were for the year.
Locally, we were spared most of the downside experienced in global markets. The JSE All Share Index’s total return for the year was 3.6% and the All Bond Index returned 4.3%. This was, however, not delivered in a straight line, but with a lot of volatility. Rand investors also did not feel so much pain in their offshore exposure, as the currency weakened by 7% against the US Dollar over the year.
What do we expect from 2023?
The one positive aspect of a not-so-great 2022 is that the entry prices into assets in 2023 are a bit cheaper. While one can buy great companies and bonds at much lower prices, the obvious question is how much of the pain is already priced in?
We will monitor the following topics and questions during 2023.
The annual inflation rate in the US slowed for a fifth straight month to 7.1% (year-on-year to the end of November), the lowest reading since December last year, and below market consensus forecasts of 7.3%. Will this downward trend continue as expected? The last few months’ positive returns (except for December) are pricing in that maybe inflation is under control and will start to roll over. If this continues, the US markets can bounce back some more, especially if the Central Bank starts to lower interest rates towards the end of the year. Locally inflation is at 7.4%. While this is lower than initially expected it is still above the Reserve Bank’s target range of between 3 – 6%.
Central Banks continued to raise interest rates in December, although at a slower rate than at previous meetings. The US Federal Reserve raised rates by 50bps to 4.25% – 4.5% during its last meeting of 2022, pushing borrowing costs to the highest level since 2007, and in line with market expectations. While high interest rates are not great for economic growth, it is great for earning high yields on bonds and cash. This makes it easier to get greater returns from more conservative portfolios.
Will the higher interest rates trigger economic recession?
If Central Banks raise interest rates too quickly it will lead to debt and borrowing becoming more expensive, slowing demand and driving the economy into a recession. The effects are normally visible between 8 to 12 months after raising interest rates.
Many European economies are already on the edge of a recession while economists are predicting a 70% chance of a recession in the US this year, albeit a relatively mild one. The burning question is whether the US consumer will keep feeding the economy, enough to avoid a recession. Early indications are that 2022 spending patterns are losing steam and might only return towards the second half of 2023.
China and their Covid problem
After a year of domestic economic volatility and international turmoil, China is expected to focus on economic growth this year, which means the country will further deepen reform and expand opening-up. For the rest of the global economy, normalising the Chinese economy could significantly ease supply chain disruptions that have contributed to rapidly rising goods inflation. However, it is worth bearing in mind that a rebound in growth in China could also boost demand for global commodities, thus contributing to inflationary pressures and proving to be a double-edged sword for global inflation.
While we predict that China will start to show positive economic signs over the next 12 months, political risk remains high and it is therefore advisable to keep exposure to this market relatively low. It is however, worth noting that if China opens up further, it will be positive for South African resource equity prices.
When and how will the war in Ukraine end?
Meanwhile, Russia’s war on Ukraine remains a key geopolitical risk that does not appear to be abating anytime soon. The effects of sanctions against Russia and their disruptive nature on oil prices and broader supply chains continue to dampen the economic outlook.
Will South Africa have the power (excuse the pun!) to get the economy going?
Load shedding will continue to crush the South African economy, especially the smaller manufacturing businesses and the effect will only be really visible years down the line. It is imperative that there is a clear political will to assist Eskom back to full capacity.
Despite the negative moves in global bond markets, local bonds returned a positive performance during a particularly volatile month. The volatile intra-month moves included the fourth largest daily decline of 4% in over two decades, which was caused by perceived heightened political risk which culminated in President Cyril Ramaphosa securing another term as ANC president at the ANC’s National Elective Conference (NEC). The most notable signal of positive political intent will be the next cabinet reshuffle, which will likely be announced at some point early this year.
South Africa’s economy advanced by 4.1% from a year ago in the third quarter of 2022, beating market estimates of 2.8% growth. It was the strongest growth rate since the second quarter of 2021. With attractive valuations currently in SA bonds and equities, an investment case can clearly be made for considerable upside.
It is clear that 2023 is a year with a lot of uncertainty. We recognise that in today’s uncertain climate, the range of outcomes in the near term is particularly wide. That is why a well-diversified portfolio is still the best investment strategy. But periods of uncertainty also often lead to the biggest opportunities in the market if you maintain a long-term view.
So, as we go into 2023 it is important to make sure that your financial goals and objectives remain relevant, even though it shifts as we grow older and as market movements make us realise how much risk we really are willing to take. The target is to reach your own personal financial goals and not merely to ‘beat the market’ and it is therefore important to understand possible shifts in your goals and to make the necessary annual adjustment to ensure financial success.
PJ Botha CFP ®, CA(SA)