US banking failures dominated financial market news in March. The impact of this was felt globally as banks’ business models, and indeed regulation, were questioned and risk appetite was muted. At the same time, major developed market central banks continued to raise interest rates to further push down inflation. Whilst economic data remained robust and pointed to a strengthening global economy, the fallout from the banking sector issues reduced expectations for future rate rises, which caused bond yields to fall and hence bond prices to rise. Equity market performance was mixed: fragility and a risk-off sentiment broadly resulted in cyclical (and particularly financials) falling, but more growth-oriented stocks bounced as bond yields (and hence the discount rate on their future earnings) fell. Follow the link below for more detail on events that transpired in the month.
Monthly Market Commentary – March 2023
LOCAL DRIVERS
SA GDP
SA’s GDP fell by 1.3% (seasonally adjusted, non-annualised) in the 4th quarter of 2022. The fall was more than expected and broad-based across sectors taking the level of economic activity back to below that experienced prior to the start of Covid. Growth expectations from numerous entities including rating agencies and the SA Monetary Policy Committee were downgraded for 2023 as the well-known constraints to economic growth continue unabated.
SA Inflation Worries
Headline inflation in SA rose to 7% in February from 6.9% in January. The market was expecting inflation to come in at 6.8%. Inflation was driven by two key items namely medical insurance costs and a large increase in food inflation which had an annual rate of increase of 14%. Core inflation also increased to 5.2% from 4.9% in January. Cost increases are to a certain extent home grown and are driven by electricity shortages which raise costs of production and supply. The energy crisis in SA is causing a stagflation issue for the country.
SA MPC Raises Rates
Despite a poor economic backdrop, the MPC raised rates by a surprise 50bps (the market was expecting 25bps) as they acknowledged upside risks and the stickiness of inflation locally. The repo rate is now 7.75% and the Reserve Bank has raised rates by a cumulative 425bps since November 2021.
Consumer Confidence Wanes
The FNB/BER Consumer Confidence Index (CCI) fell to -23 in the first quarter of 2023 and is the third-lowest reading since the index’s inception in 1994. The dramatic fall was broad-based across all sub-indices and reflected the sombre mood and general level of concern that South Africans are facing around their personal finances and their public perceptions of the local economy.
Current Account Deficit
SA posted a current account deficit for the first time in three years as import prices increased and export volumes and prices fell off. The deficit for Q4 2022 came in at 2.6% of GDP, slightly higher than expected and swung the current account into a deficit of 0.5% of GDP for the 2022 year.
ASSET CLASS TOTAL RETURNS – ZAR
GLOBAL DRIVERS
US Bank Failures
One of the more significant events in the US during the month was the failure of 3 regional financial institutions (Silicon Valley Bank, Signature and Silvergate), sending shockwaves through the financial system globally. This prompted the US federal reserve to launch an emergency scheme to lend banks cash loans in return for government & agency debt.
US Rate Rise
The Federal Open Markets Committee voted to increase interest rates by 0.25%. Up until the bank failures, markets were expecting a 0.5% increase as whilst headline inflation continued to fall, down to 6% in February from 6.4% in January, core inflation only ticked down slightly from 5.6% to 5.5%. This core reading was the lowest reading in over a year but remains higher than hoped and is still dominated by elevated housing/shelter costs.
ECB Rate Rise
Not to be left out, the European Central Bank (ECB) raised rates by 0.5% in March, in-line with what they had said after their previous policy meeting in February. Future rate rises may be smaller, however, given that inflation fell further than expected to 6.9% in the flash March figure, from 8.5% in February. Core inflation, however, remained high and actually rose to 5.7% for March. Nevertheless, unemployment remained at a record-low 6.6% in February and the composite PMI for March rose to 54.1, from 52 in February.
Credit Suisse
The US bank failures hit bank share prices in mainland Europe, in particular those of Credit Suisse. They had been struggling for a few years and in March needed a state-backed takeover by UBS. The forced sale of Credit Suisse to UBS in Europe, triggered a period of general banking stock volatility during March.
China Anomally
China’s economic re-opening remains a dominant theme. Data from China shows strong expectations for future economic activity as the composite PMI for February was 54.2, the strongest level since last June. Also, China hasn’t suffered from high inflation like the rest of the world, aided by their zero-COVID policy, headline inflation fell to 1% in February from 2.1% in January.
ASSET CLASS TOTAL RETURNS – USD
All information provided courtesy of Portfolio Metrix – adapted and published with permission. No copyright infringement intended.
SHARE THIS ARTICLE