February proved to be a mixed, but broadly negative, month for South African financial markets, driven by the stronger-than-expected US market data that confirmed higher and more widespread inflation, more robust retail sales and industrial production, and a still-improving labour market. These combined to shift global market sentiment back to a view of “higher interest rates for longer”, which the US Federal Reserve confirmed in subsequent comments, sending bond and equity prices lower around the world. Emerging markets underperformed developed markets, and South Africa was unable to escape the sell-off, especially the fall in commodity prices that accompanied the deteriorating sentiment.
In what was an eventful month in South Africa, financial markets greeted the 2023 National Budget favourably for its improved government deficit targets and the proposed restructuring of Eskom debt. However, this good news was short-lived due to the country’s grey-listing two days later by the Financial Action Task Force (FATF), a global financial watchdog. Speculation over its negative impact dominated the market for a few days, but on the day bonds actually gained ground and the rand was little moved. South African bonds (ALBI) recorded only a -0.9% loss for the month. While the rand did lose a meaningful 5.4% against the US dollar in February, this was at least partly attributable to USD strength on the back of the “higher interest rates for longer” view, as well as the negative sentiment stemming from ongoing load shedding.
Valuations of both South African bond and equity markets remained materially more attractive than their global counterparts in February.
For now, we believe patient investors will be rewarded by waiting out market weakness and volatility caused by sudden changes in market sentiment like we experienced in February. Uncertainty remains high, and such times are testing for investors. From experience, however, we know that holding attractively valued and well-diversified securities can help protect the downside, but that it can also take time to unlock the value in these assets.
Adapted article by M & G Investments