In contrast to December, January opened on a bullish trend that continued for most of the month. There was, however, some nervousness by the end of January as some investors decided to take profits and murmurs of recessionary talk spiked up again. Overall it was a good month for risk assets with the MSCI World Index and MSCI EM Index returning 7.25% and 8.09% respectively. But the darling asset class of the month was Global Property, with the S&P Global REIT Index up 9.62% for the first month of 2023 (all returns in US Dollar terms).
The possibility of a continued commodity supercycle over the medium term was a talking point in most of our discussions this month. With the world slowly moving past the Covid-Era and China cautiously reopening its economy, we expect demand for many commodities to start picking up again. This is already evident in the slight lift in the oil price and could pull through to other commodities as well.
But by far the most contested discussions centered around the fear of a global recession and its impact on world markets. We have already seen in December how the market can react when the word recession pops up, as most of the extraordinary gains of the last quarter was dashed in a few weeks. But it’s the FED that is probably going to have the biggest role to play in what happens in the global economy over the next 18 months. An overly hawkish FED would certainly give inflation a proper gut-punch but could push global economies over the edge into a proper recession. On the other hand, a dovish FED would certainly help stabilize the economy and stimulate growth, but it could also mean that inflation rears its destructive head again and cause more damage. Our base case is a much more moderate FED. With one or two smaller rate hikes before stepping back and saying, “we’ve done enough now.”
Unfortunately, there are duplicities everywhere you look, making any type of prediction rather difficult. Let’s take the aforementioned China reopening progress – a reopening should be very positive for growth in general bringing some much needed supply back into the market and hopefully clearing up some of the backlog that still exists. Unfortunately, this also means more demand for oil and other commodities that will cause prices to rise and will give inflation another unwanted boost. The same can be said for the FED’s rate decision. Stop (or reverse) the hiking cycle too soon and inflation could come back with a much stronger bite, but if Mr Powell keeps going on the hawkish trend he could be driving the US economy (and with it, the world) into a massive recession.
The US Bond market isn’t looking to happy either with prices seemingly pricing in a hike cut later in the year as a foregone conclusion. This is not our base case as we think that there is a good chance that the FED could keep rates higher for longer, especially if any recession is short and shallow in nature. If that is the case, then now would not be the time to fill your boots.
On the local front, the duplicities continue. We saw the JSE All Share Index reach record highs during January, returning 8,89% for the month. This is a strong showing, especially when compared to other asset classes like the ALBI and Listed Property returning 2,94% and -1,00% respectively.
But the main issue remains Eskom and the rolling blackouts. With our energy situation impacting heavily on production and with companies struggling to deal with the downtime, it’s difficult to see any growth in GDP forecasts in the near future. There is some legislative reprieve though, as government seems more keen on allowing private energy producers to add to the grid, which could keep us out of a total grid collapse in the near future.
Overall, our neutral to overweight exposure in SA risk assets helped our relative performance, as did our neutral global asset exposure.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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