November 2022 Economic Review

For two consecutive months, global and local markets managed to recover some of the steep losses that we saw during the year. As we move to the last month of the year, the 2023 outlook remains gloomy and the coming year expects recession for both the developed and emerging market economies. Goldman Sachs’ Global Investment Research (GIR) forecasts a slowdown in the pace of interest rate hikes as moderate inflation hits and supply chain pressures continue to ease.

Investors have faced uncertainty over the last few years and markets have been volatile, but experience has shown us that those who remain invested and stick to their long-term objectives are rewarded for their discipline. Despite the challenges that the markets faced during the year, the performance in November for equities and bonds could be a blueprint for 2023.

US economy – Fed to slow down on raising interest rates

US stocks had a record rally in November, while the US dollar depreciated against a basket of currencies. The decrease was largely driven by inflation prints that indicated a fall in consumer price increases. The US annual inflation rate slowed for a fourth month to 7.70% in October versus 8.20% in September as supply chain disruptions continued to ease. After a series of disappointments for much of 2022, the CPI print was the lowest since January and the first annual increase to be below 8% in eight months. The US CPI rose by 0.40% in November compared to September. This is below consensus expectations of 0.60%. The US economy is still faced with inflationary pressures and broad price increases that are largely contributed by the services sector.

As anticipated, the Federal Reserve (Fed) raised interest rates for the fourth consecutive time in November as inflation and labour markets continued to move in a hawkish direction. Fed Chair Jerome Powell signalled that the Fed would slow down the pace of the interest rate hikes in December. He also warned that borrowing costs will need to keep rising and remain restrictive for some time to beat inflation. The Fed officials pointed out that US inflation remains above the 2% target level. As a result, Goldman Sachs’ GIR now forecasts a slowdown in the pace of hikes to 50 basis points in December.

Although the US economy has seen a steady recovery in the last two months, the outlook for 2023 remains downcast. The US economy is expected to go into recession at the beginning of 2023 as the impact of tighter monetary policy weighs on activity.

China is preparing to phase out zero-Covid policies

The Chinese zero-Covid policies inspired protests across the country and rejected the prospect of endless testing and lockdowns. The country’s vice premier, Sun Chunlan, said the country is facing a new situation and new tasks in epidemic prevention and control as the pathogenicity of the Omicron virus weakens. In addition, more people are vaccinated and experience in containing the virus is accumulated.

The Chinese economy has been suffering due to the strict lockdown restrictions that have stunted the country’s consumer confidence and growth. Not all businesses have struggled through China’s zero-Covid era. Most of the companies that produce Covid-19 tests have seen an increase in their earnings for the third quarter of 2022. Despite the rising Covid cases in China, the Chinese economy continues to be under pressure and is still faced with the housing crisis and ongoing geopolitical tensions between China and the US.

On a positive note, this month the US President Joe Biden and China President Xi Jinping met for the first time. While expectations for tangible progress between the world’s top two economies are slow, the outcome of the meeting exceeded expectations. President Joe Biden said the two sides will resume cooperation on issues including climate change and food security. The question at hand is whether the US and China will start building ties to strengthen the relationship between the two countries even after the US elections.

UK economy enters into a recession

The UK economy remains under pressure as the Bank of England (BoE) followed the Fed to raise interest rates by 75 basis points in November. The outlook for the UK economy is very challenging as the BoE forecasts the UK already in a recession and that GDP will fall for eight straight quarters until mid-2024.

During the month, we saw turmoil in the UK markets after Britain unveiled a painful budget with £55 billion in tax hikes and spending cuts. This came after the UK failed to confirm that the economy is already in a recession. Finance minister Jeremy Hunt said the measures were needed to bring financial stability after the recent turmoil in the markets, however, the measures did not reassure British markets since we saw the pound falling and government costs rising. Losses on the stocks deepened before retracting to end the month positive.

On the data front, Q3 Gross Domestic Product (GDP) data indicated that the economy contracted by 0.20% quarter-on-quarter.

Rising energy prices continue to haunt the Eurozone area

Inflation in the Eurozone area remained high, and the Euro area headline inflation rose to 10.70% year-on-year in October versus 9.90% in September. As a result of this upside, Goldman Sachs’ GIR now expects Euro area inflation to peak at 12.10% in January 2023 on the back of continued pressures from energy prices. Germany saw a relief in producer prices in October which fell by 4.20% and brought some positive news on the inflation front. However, energy prices continue to haunt regions like Italy which saw an increase of 24.10% month-on-month in October alone.

SA President under pressure as Phala Phala case gathers steam

The National Executive Committee (NEC) of the African National Congress (ANC) is faced with major political decisions to make before the ANC heads for its annual conference in December. This comes after the Section 89 panel report found that President Cyril Ramaphosa may have contravened the Constitution and anti-corruption laws with his dealings at the Phala Phala game farm.  The South African economy is still faced with extensive bouts of load shedding as SA heads for the longest stretch of power cuts into 2023.

On a positive note, the South African CPI print eased further to 7.50% in September versus 7.60% in August. As anticipated, the South African Reserve Bank (SARB) delivered a third consecutive 75 basis point rate hike during the month following global peers and pushing rates to 7% for the first time since mid-2017. Despite the SARB hike, the local stock market had its best month in two years and the local 10-year government bond yields ended lower for the month.

MARKET OVERVIEW

Global markets

For two consecutive months, global markets have managed to recover some of the steep losses that we saw during the year. The month started with a much anticipated fourth consecutive rate hike from the Fed. Mortgage rates have risen sharply in response to aggressive interest rate hikes, however, the US appears to be better insulated from mortgage payments shocks in 2023 when compared to other countries. Fed Chair Jerome Powell signalled that the Fed would slow down the pace of the interest rate hikes in December following a softer US inflation print for the month. The MSCI World Index closed 6.95% up m/m in USD and 1.08% down in ZAR. The Nasdaq 100 Index, which was impacted by previous central bank tightening recovered massively to end the month positive at 7.50%. The US 10-year government bond yields decreased by 0.30% to 3.80%.

Emerging market stocks rebounded to end higher than their developed market peers. The MSCI EM Index came in at 14.85% m/m in USD and 6.22% m/m in ZAR. The Chinese Hang Seng Index led the gains by ending 29.10% for the month. The positive gains were followed by constructive talks between President Xi Jinping and US President Joe Biden at the G20 summit, an announcement of some bailouts for China’s poverty sector, and initial signs that the Chinese government will start to ease strict Covid-19 lockdown restrictions.

Local markets

The local stock market had its best month in November in over two years. The FTSE/All Share Index came in at 12.33% m/m and 5.98% YTD. A significant contribution came from Naspers and Prosus, both up by 39% m/m, as they benefitted from a massive rally from Chinese tech company Tencent. The resources sector came in at 16.02%, the only disappointment came from Sasol, which came in lower at 3.00% down m/m as it tracked the oil price lower. The South African CPI print eased further to 7.50%. As anticipated, the SARB delivered a third consecutive 75 basis point rate hike during the month following global peers and pushing rates to 7% for the first time since mid-2017. Despite the SARB hike, the local 10-year government bond yields followed global yield lower, ending the month 0.50% down at 10.80%