By Chantal Marx.
2023 - The year that was
This year the markets kicked off on uncertain terms with the growth outlook marred by several unknowns and "what ifs". What if the Fed's interest rate hikes break something? What if we have more geopolitical drama? When will China re-open? Will we ever see the end of load-shedding in South Africa (SA)? What if looming issues at Transnet become a bigger problem?
The Fed did break something, but the regional banking crisis was contained and short lived. Conflict in the Middle East re-emerged, although the impact on global growth and importantly oil has so far been limited. China re-opened but it was with anything but a "bang". Load-shedding persisted and while impeding growth somewhat, industries and households have adapted well. Transnet's issues unfortunately intensified to become the dominating local economic growth constraint.
Our expectation for markets at the start of the year was again cautious with the possibility of recession in several major economies flagged as a major risk.
Several large economies, notably the United States (US), were expected to enter recessions or at least come close to entering one in 2023. We were less pessimistic on the second half of the year.
At the time of writing, the recession in the US had not materialised. Quarter after quarter, the strength of the US economy continued to surprise economists and market participants alike. The theme of “US exceptionalism” gained traction, and in the final quarter of the year the dominating narrative shifted from a US recession to a "soft landing".
The advent of Chat-GTP spurred major enthusiasm in Artificial Intelligence (AI) as a thematic. Major US technology companies exposed to this theme performed exceptionally well, supporting a very strong performance from the Nasdaq and S&P 500 in aggregate. For most of the year, outside the "Magnificent Seven", US stock market returns were notably less impressive although the emergence of the "soft landing" as the dominating narrative in November saw more breadth emerging in the equity market uplift.
Also holding up the US economy was a US consumer remaining in a relatively solid position because of continued buoyancy in the labour market and a drawdown of savings that were shored up substantially during the Covid-19 pandemic. Furthermore, US fiscal spending remained expansive, countering the Feds restrictive path on the monetary policy front.
We were optimistic that China's reopening (that had not yet occurred at the start of 2023) would see the outlook improve. We highlighted, however, that haphazard policy pronouncements remained a risk.
China's reopening spurred major optimism at the start of the year but failed to provide thrust throughout the year - not because of the policy environment, but rather because of a very slow reaction from Chinese consumers to the less restrictive environment. Economic data remained mixed throughout most of the year and the external environment, while not recessionary, softened.
For SA, our economics team expected economic activity to slow significantly alongside the expected moderation in global growth.
While the slowdown did materialise, outcomes have been unusually volatile, reflecting the post-pandemic forecasting complexity and the dynamic impact of domestic infrastructure inefficiencies such as electricity supply disruptions (which we were already aware of) and logistical challenges (that emerged as a major imminent threat). In particular, the first half of the year was exceptionally positive, with the first two quarters recording 0.4% and 0.5% quarterly expansions. Meanwhile, the start of the second half has been downbeat, with growth underwhelming expectations. We think the agricultural sector may rebound strongly in 4Q23 and sharp inventory destocking in 3Q23 could propel production ramp-up by the mining and manufacturing sectors in the last quarter, but enduring growth will have to be supported by more broad-based investment. We maintain a relatively soft 0.8% GDP real growth expectation for 2023 (down from 1.9% last year) but are cognisant of the material downside risk as it relates to our network industries.
The rand was expected to remain volatile and undervalued as global financial conditions remained tight and economic activity slows. The rand faced pressure from an external financing perspective as the current account balance had turned into a deficit.
The rand was exceptionally volatile this year, as expected. At the time of writing, the rand had lost 10.9% against the US dollar on a year-to-date basis, the fourth weakest among the 30 major global currencies against the greenback. The US dollar remained strong in the year due to continued rate hikes by the US Federal Reserve (far more than what was predicted at the start of the year) and heightened geopolitical risk. Only seven major currencies strengthened relative to the US dollar in 2023 - the Columbian peso, Mexican peso, Polish zloty, and the Brazilian real were notable outperformers.
Outside of dollar strength, the rand was weighed on by a sharp deterioration in certain commodity prices and a weakening fiscal position, along with other idiosyncratic factors (Eskom! Transnet! Grid Collapse! Putin! Lady R! AGOA!) dampening SA's appeal as an investment destination - both in terms of foreign direct investment and portfolio flows.
We noted that the local equity market was still not expensive relative to history and its peers and regarded real rates offered from bonds as still attractive. We expected returns above inflation from local risk assets.
While the bond market staged a late recovery to provide decent returns relative to inflation and cash rates, the equity market overall struggled - particularly in the second half of the year. The weakness was, however, sector and stock specific - with underperformance from several heavyweight industrial stocks, and the Resources index dragging the market lower. The JSE All Share Index delivered a total return of just 4.8% but considering the SA Inc stable, the performance was notably better. The JSE Financial 15 Index returned 14%, the small cap index delivered 6.2%, and the All Share excluding Resources, secondary listed companies and Naspers showed a return of 11.2%.
2024 - The year ahead
When considering our expectations and positioning for 2024, we are experiencing a pronounced sense of déjà vu. While it seems as if market participants are currently leaning more towards a soft landing as opposed to a recession at the start of the year, we are still concerned that the recession in the US has been delayed and not necessarily avoided. Regardless of severity in the US, the expectation is still for below trend growth in 2024 from most economies.
In SA, we see growth lifting to just above 1% next year as network industry constraints continue to bite, but lower inflation, improving external demand, and some interest rate relief could provide support.
