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Multivest Market Watch - September 2023


Global equity market performance in September was generally negative, as most regions and sectors faced increased selling pressure amid rising bond yields, inflation concerns, geopolitical tensions, and surging oil prices. Inflation data were mixed across the regions, meanwhile global central banks signaled their “higher for longer” stance on interest rates, as they tried to balance the risks of inflation and growth slowdown.


The downturn in inflation, which started in April, gained impressive traction over July, with the headline figure sliding to a two-year low of 4.7%, comfortably within the official 3-6% target range and very close to the SARB’s preferred target of 4.5%. The deceleration mainly reflects the effects of the high base established last year when Russia’s war on Ukraine resulted in a surge in global energy and food prices. These shocks are now unwinding, accelerating inflation’s decline in many countries. Local food prices have been much sticker, lagging the downturn in global prices as a sudden escalation in electricity outages forced local suppliers to rely on expensive generators, which amplified domestic input costs and severely compressed profit margins. Fortunately, these cost pressures eased somewhat over the past few months as the country’s electricity supply improved over the winter. As a result, food inflation also started to recede more convincingly, falling from a high of 14.4% in March to a one-year low of 10% in July.


Courtesy: Nedgroup Investments

 

Multivest Chart Book - September 2023

Source: Multivest Research

 

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.

 

OPEC+ may cause the global stance in interest rates to be just a pause

Lower oil production by OPEC+ causing a shortage of around one million barrels per day contributed to oil prices closing in on $100 per barrel. OPEC+ asserts less supply is based on lower demand, mostly caused by central banks raising interest rates. Should this “stand-off” between central bankers and oil producers continue (an ongoing cycle of cutting oil production as interest rates are raised), higher oil prices may add renewed pressure on global consumer price inflation (CPI) to remain above target for longer, pressurizing central banks to raise interest rates again. Elevated oil prices accompanied by a United States driven period of “risk-off” contributing to a weak rand exchange rate, will renew pressure on South African CPI to increase and for the SARB to raise interest rates.


Most of the economic and political action affecting markets occurred in the United States (in September). While solid economic growth numbers for the third quarter should be announced in October, the outlook for the fourth quarter is less promising. Although an immediate “fiasco” was averted on the last day of September when lawmakers approved a stop-gap bill for additional funding to keep the government going, this ends on 17 November, when they will have to submit new plans to fund government services. Also, the risk of a shutdown of the federal government will remain as funding is estimated to run out by the end of the year. In addition, the labour strike (for among others higher wages) at General Motors, Ford and Stellantis (Big 3 automakers) is entering its third week and is expanding to more workers (25 000 are already striking). This will disrupt supply chains and reduce spending and saving. Furthermore, student debt repayment (by millions of borrowers) will return on 1 October (debt service payments on Federally funded student debt were halted in the COVID-19 pandemic). Estimates are for this to subtract half a percent from consumption spending. Then, the delayed impact of interest rate increases on consumer spending will intensify as accumulated savings (in COVID-19) run out. Moreover, if oil prices remain elevated, it will suppress consumer spending and contribute to higher CPI. The Federal Reserve may therefore increase interest rates more than currently anticipated. These risks are bound to contribute to weaker economic growth in the United States in the fourth quarter, implying a prolonged period of risk-off, and therefore a stronger US dollar.


The central banks of both the European Union (EU) and United Kingdom were in sync with the Federal Reserve by keeping interest rates unchanged in September. Although CPI is increasing at a much slower pace, higher oil prices may limit the declining pace. The Bank of England expects inflation to return to the 2% target by mid-2025 only, but still earlier as the Federal Reserve’s forecast of 2026 in the US. In the meantime, the UK will postpone some of their “clean energy targets” to 2035 from 2030. And the EU is unhappy with China becoming the largest exporter of electric vehicles. The EU can’t compete with China on price and is launching an investigation into whether China’s electric vehicles are subsidised by the Chinese government. Electric vehicle production in China is one positive, though, in a Chinese economy struggling to live up to its performance promises.


Although South Africa’s electricity outlook improved somewhat, the country is facing several headwinds. Tax collections are lagging, an indicator of weak economic growth. However, if the government fails to reign in spending commensurate with the weaker revenue collections, the fiscal deficit will be much higher than announced in the budget. Within a period of international risk-off sentiment, the rand exchange rate may continue on a depreciating path. Coupled with the higher fuel price, CPI may rebound more and contribute to the South African Reserve Bank to action on its hawkish statement (when interest rates were left unchanged in September) and increase interest rates in November.


Multivest Economic Division

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