A new year brought better fortune to global markets. Inflation falling in-line or more than expected prompted hope that central bank interest rate hikes might soon end. Improving inflation figures were helped by lower energy costs, especially in Europe as demand fell helped by warmer weather. Market sentiment was also boosted by activity picking up quickly in China after they dropped their Covid restrictions late last year. During the month, bonds delivered strong returns as future interest rate expectations fell, and equities rallied on the back of improving economic data. Follow the link below for more detail on events that transpired in the month.
Monthly Market Commentary – January 2023
LOCAL DRIVERS
SA Inflation Rates
Annualised CPI in December eased to 7.2% (November: 7.4%). Although several items remained above the SARB’s target, the direction of travel for inflation seems to be downward. This allowed the SARB MPC to ease its rate hiking to 25bps taking its cumulative increases to 375bps and leaving the repo rate at 7.25%
Electricity Crisis
Eskom woes escalated in 2023 with stage 6 loadshedding becoming the daily norm. Already the hours of loadshedding in January 2023 equated to 20% of all the loadshedding experienced in 2022. South Africans are frustrated but it seems that loadshedding of this sort will be with us for at least the next 24 months. The crippling effect on the economy, and in particular small businesses, cannot be underestimated and will pose as a significant drag on the economy for some time to come.
Seriti Wind Farm
Seriti Resources, a coal mining company, that supplies roughly 32% of Eskom’s coal and who’s founder cut his teeth at BHP Billiton and then Optimium Coal (the controversial previously Gupta-owned coal company) has signed a major power purchase agreement that will see the construction of a 155MW wind power project in Mpumalanga. This will be the largest wind project in the country and the first of its kind in the province. The choice of location for this wind farm is an interesting one given that other areas in the country have much higher and more consistent wind.
SA Mining Output
Mining production fell 9% for the year in November, whilst mineral sales fell 15% over the same period. It is estimated that mining production in 2022 declined by 6%. The reasons for this have less to do with labour issues and more to do with failing utilities such as Eskom and Transnet.
SA Producer Prices
The change in prices of goods bought and sold by manufacturers, producer price index (PPI), declined for a fifth month running in December to an annual rate of 13.5%, beating market expectations. This was mainly due to a moderation in fuel prices as international oil prices declined.
ASSET CLASS TOTAL RETURNS – ZAR
GLOBAL DRIVERS
Inflation Cooling
Inflation in the US and eurozone cooled, strengthening market hopes that central banks can take their foot off the monetary tightening pedal. US inflation fell from 7.1% in November to 6.4% in December with the Eurozone reading moving from 10.1% to 9.2% (and subsequently 8.5% for January).
US Labour Market
The December labour market report showed stronger than expected job gains and a fall in the unemployment rate to 3.5%, matching its 53-year low. However, average hourly earnings rose 4.6% year-on-year (yoy), lower than the recent peak of 5.6% seen in March 2022. If wage pressures continue to ease, the Fed may not need to push rates much higher.
US GDP Growth
The US economy beat expectations in the last quarter of 2022 as GDP increased 2.9% annualized. This was softer than the third quarter reading of 3.2% however stronger than expected and raised hopes of a potential “soft landing” as jobs data remained robust.
China Population Decline
For the first time in 60 years, the Chinese population fell in 2022 by approximately 850,000 people to 1.411 billion. The UN predicted last year that the population of India would exceed that of China in 2023 and this looks set to happen. Long term growth rates are strongly tied to demographics with a falling population having negative consequences for potential growth and domestic demand.
Tech Layoffs
Mass tech layoffs continued in January 2023 and are expected to persist throughout Q1 2023. A tech layoff tracker, Trueup.io, reported that approximately 106,950 employees across the tech industry lost their jobs in January 2023, making it worse than the combined job losses in November and December 2023 (50,573 workers and 40,368 employees, respectively). Amazon, Google, Microsoft and Salesforce sacked the greatest number of workers in January 2023. The culling of the tech workforce began in November when Elon Musk formally took over Twitter.
ASSET CLASS TOTAL RETURNS – USD
All information provided courtesy of Portfolio Metrix – adapted and published with permission. No copyright infringement intended.
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