Global financial markets resumed their recovery in January after December’s losses, propelled by improving data in a number of areas, including a shifted consensus pointing to a sooner-than-expected end to interest rate hikes in the US (and elsewhere), upside surprises to corporate earnings, and expectations of shallower growth downturns than previously anticipated. Risk assets were again in favour, with global equities outperforming global bonds and emerging market equities outperforming developed market equities. For the month, global equities (the MSCI All Country World Index) returned 7.2%, (in US$).
In South Africa the FTSE/JSE Capped SWIX posted a robust return of 7.0%, and SA nominal bonds (All Bond Index) delivered 2.9% for the month. Strong returns came from Chinese consumer-related stocks like Naspers, Prosus and Richemont amid China’s ongoing reopening, as well as other global stocks like Sasol and Textainer, although Resources counters were broadly disappointing. Financials also posted positive gains, but Listed Property (ALPI) was marginally in the red.
Valuations of both South African bond and equity markets remain materially more attractive than their global counterparts. As 2022 demonstrated, valuations can provide a useful buffer in periods of distress (although this is not always the case).
Macroeconomic risks remain, however, given the uncertainty around the possibility of further and longer interest rate tightening by the US Federal Reserve than currently priced in by the market. This will depend on the pace at which inflation normalises. A downward trajectory in inflation will not automatically provoke interest rate cuts if this fall occurs more slowly than forecast, or if the projected end point for inflation sits materially above the Fed’s 2% long-term target. Earnings disappointments are an additional concern going forward.
For now, we believe patient investors will be rewarded by waiting out the further dips in growth expected in the first half of 2023, as well as any other possible disappointments, and not sell their holdings on market weakness.
Adapted article by M&G Investments