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Multivest Market Watch - March 2023


Bond returns look bright

Despite the elevated domestic and international risks to the local market outlook, we believe there is value in certain asset classes. From an asset allocation perspective, we continue to expect nominal bonds to outperform other local asset classes, both on an absolute and on a risk-adjusted basis, followed by cash, inflation-linked bonds (ILBs) and listed property. While we believe equities at an index level provide little upside, there are certain sectors that could outperform.


Multivest Chartbook - March 2023

 

Multivest Portfolio Returns



Disclaimer: The investor is liable for CGT on any transactions in the units of the underlying unit trusts within the wrap funds. Compulsory investments are not subject to CGT. Performance is calculated using net returns(after fees) of the underlying unit trusts, and quoted excluding wrap fund fees. Performance quoted is pre-tax. Fund performance numbers shown are for a notional portfolio and do not reflect the actual performance of the client invested in the wrap fund due to timing differences of investments or disinvestments of the client. Benchmark returns for CPI are based on actual published returns and an estimated one month return for the month of the report date. ASISA Benchmark returns are the ASISA returns available as at the time of reporting.

 

“Expected” bank instability “surprises” did not derail interest rate decisions

March was characterised by small and large bank failures in the US and Europe, contributing to volatility in financial markets, but central banks nevertheless continued to raise interest rates to slow economic growth and contain consumer price inflation (CPI). These policies are working as economic growth is slowing and CPI declining. In South Africa, unique circumstances prevented weak economic activity to lower CPI and the SARB surprised by raising the repo rate by more than market expectations.


Bank failures are not uncommon and normally occurs when central banks aggressively increase interest rates. In the aftermath of the Global Financial Crisis which occurred following sharp interest rate increases in 2008, there were 389 global bank failures from 2009 to 2011. This slowed to 93 from 2012 to 2014. However, from 2015 to 2022, when interest rates were low, global bank failures amounted to 29. So, some bank failures were to be expected following the fast and sharp increases in interest rates. But we had to wait till March 2023 for three US banks to close their doors and rock confidence. And then the second largest bank in Switzerland, Credit Suisse, had to be rescued via a take-over by UBS. Fortunately, globally the authorities reacted quickly to protect depositors and prevent a prolonged fallout in financial markets. Nevertheless, tighter lending standards will follow, slowing credit extension. Combined with interest rate increases, this will slow global economic growth - only from the second half of 2023. Therefore, expected reductions in interest rates will be pushed out from late 2023 to next year.


In the US, the Federal Reserve increased interest rates by 25 basis points – despite the bank failures. And another 25 basis points is expected in May. Tighter lending conditions is expected to slow economic growth to less than 1% in the second half of this year and to remain close to 1% in 2024. CPI slowed to 6% in February from a high of 9.1% in June 2022 and is expected to dip below 3% by the end of the year. The first interest rate reduction may occur in the first half of next year.


In Europe, the ECB continued to increase interest rates at a faster pace than the US, namely by 50 basis points. CPI in the Euro area was still high at 8.5% in February, somewhat lower than the high of 10.6% reached in October 2022. It may decline to around 4% by the end of the year as the ECB signalled its determination to bring CPI under control. Interest rate increases may therefore continue into the third quarter of 2023, but the pace is expected to slow to 25 basis point increases.


The Bank of England also increased interest rates by 25 basis points in March, citing an improving economic growth outlook as the main reason for the hike. However, CPI in February increased to 10.4% from 10.1% in January, confirming a bit more stickiness in prices. CPI is nevertheless expected to decline to below 3% by the end of the year, necessitating no further increase in interest rates.


In China, the government re-affirmed its economic reforms and opening of the economy. Although an economic recovery is expected from the second quarter onward, thus far the re-opening has not supported higher commodity prices.


South Africa’s economy shrank by 1.3% in the fourth quarter of 2022 from the previous quarter, but registered growth of 2% for 2022. Continued load-shedding for longer hours was the main reason for the contraction. Daily load-shedding for most of 2023 is expected, and the country will be lucky if the economy registers growth in 2023. Load-shedding, higher electricity prices and a weaker rand is to keep CPI sticky at 6% to 5% for the year. The SARB therefore raised the repo rate by 50 basis points in March, more than the expected 25 basis points.

Multivest Economic Division

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