In January, the global economic landscape reflected continuity from the preceding month, with the MSCI World Index registering a modest 1.2% month-on-month gain. However, the trajectory leading to this was underscored by uncertainties emanating from the signals given by the US Federal Reserve (Fed) concerning potential postponements in rate cuts, in contrast to prevailing investor expectations. US economic indicators portrayed a nuanced scenario, where headline inflation for December surpassed projections, reaching 3.4% year-on-year (YoY), while core inflation exhibited a more subdued deceleration, standing at 3.9% YoY. The US labour market demonstrated resilience, with an uptick in jobs added month-on-month, coupled with accelerated wage growth and an unexpected expansion in retail sales. This initially prompted an elevation in US 10-year government bond yields, introducing headwinds for equities that experienced a downturn by mid-January. However, prevailing positive sentiment eventually facilitated a recovery in equity markets by the end of the month.
On the central banking front, both the European Central Bank (ECB) and the Fed unanimously elected to maintain prevailing interest rates at their respective January meetings, aligning with prevailing expectations. The US Dollar exhibited strength against major currencies, excluding the Indian Rupee, while Brent crude oil rebounded above $80 per barrel due to heightened tensions in the Middle East and disruptions to the Red Sea shipping route. Emerging market equities, notably Chinese equities, perpetuated their disappointing trajectory into 2024, with the MSCI Emerging Markets Index recording a 4.6% month-on-month decline. Efforts to stimulate investor confidence through Chinese stimulus measures were unsuccessful, compounded by persistent concerns regarding the Chinese housing market.
Shifting focus to local markets, South African stocks encountered a challenging outset to the year, with the FTSE/JSE Capped SWIX Index declining by 2.9% month-on-month, in line with the broader emerging market trend. Weak commodity prices exerted downward pressure on mining shares, contributing to the overall downturn in performance. Companies focused on the domestic economy, particularly telecom giants MTN and Vodacom, faced setbacks attributable to currency devaluations affecting their African operations. Conversely, discretionary retailers, notably Mr Price, provided a positive outlook, manifesting a 9% month-on-month increase propelled by better-than-expected trading updates.
The rand-hedge segment of the local market emerged as a bright spot with a 3% month-on-month gain, supported in part by a weakened domestic currency. Richemont returned 10% month-on-month, indicating a potential reversal of overly negative sentiment within the luxury goods sector. The listed property sector sustained its positive momentum into 2024, posting a 4% month-on-month gain in January following a period of disappointing returns.
The South African Reserve Bank (SARB) maintained the country’s benchmark interest rate unchanged for the fourth consecutive meeting in January. Core inflation remained stable at the mid-point of the SARB’s target range (4.5% YoY), and the 10-year government bond yield concluded the month unchanged at 11.4% per annum, in concordance with global yield patterns.
Our portfolios benefitted from being neutral on risk assets, both locally and globally. Our views are that the US remains resilient, but that the effects of rates staying higher for longer must be felt in some shape or form. This might facilitate a move from DM to EM risk assets, but we don’t see the opportunity to do so just yet. This will also affect South African assets in a similar way, although there are too many variables in a year when ‘politicking’ is going to go into overdrive. We, therefore, remain with our current asset allocation heading into February 2024.
Source of all data Morningstar, unless otherwise stated.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
The content of this article is for information purposes only and does not constitute an offer or invitation to any person. The opinions expressed are subject to change and are not to be interpreted as investment advice. You should consult an adviser who will be able to provide appropriate advice that is based on your specific needs and circumstances. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable and given in good faith, but no representation is made as to their accuracy, completeness or correctness. MitonOptimal South Africa (Pty) Limited is an Authorised Financial Services Provider Licence No. 28160, regulated by the Financial Sector Conduct Authority (FSCA) – Registration No. 2005/032750/07.MitonOptimal Portfolio Management (Pty) Limited is an Authorised Financial Services Provider Licence No. 734, regulated by the FSCA – Registration No. 2000/000717/07.