As we approach the end of the first quarter of 2023, we can look back on the first few months of the year as being anything but uneventful.
The year started optimistically with the hope that inflation was being brought under control and the major weapon used by central banks to fight it – rising interest rates – would level off and perhaps in the latter part of the year, begin to decline. With the US economy remaining strong, with almost full employment, the Federal Reserve was reluctant to halt its interest rate policy to curb inflation. After all inflation was running at 6% against the bank’s target of 2%. There was work still to be done.
However, suddenly a generally unforeseen consequence of interest rate hikes was the collapse of US bank, Sillicon Valley, which had suffered a run following an abortive attempt to raise capital to cover for losses in its bond investments due to increasing interest rates. For those who don’t know there is an inverse correlation in bond investments between interest rates and capital value. As rates rise, capital values decline and vice versa.
Folloiwng the collapse of SVB and two other regional banks, concerns were quickly raised about whether or not this was likely to be the start of a general banking crisis along the lines of the one in 2007/8. Although this has been refuted by most commentators and rightly so, there is still some nervousness as far as the banking sector is concerned. Prompted by the Swiss government, UBS was quick to buy out the ailing Credit Suisse bank. However, for some years the latter had been in some difficulty and its demise was not all to do with the sudden interest rate increases.
Naturally markets reacted negatively to the SVB news but have since stabilised. The MSCI world equity index is up nearly 4% for the year with our own JSE Allshare positive by 2%. However, the usual bugbear in this part of the world is the local currency which is down some 8% against the USD and nearly 10% against the Euro in 2023. Normally the Rand takes its cue from trends in the major global currencies but this time local issues seem to have played a part as the performance of the local currency has not fared well against those of other emerging markets. Certainly, Eskom and the economy, but also a degree of political instability which may well continue in the run up to next year’s election, have played their part in the poor performance of the Rand so far.
As we look forward to the rest of the year, there is no doubt there are numerous headwinds to be encountered. The rapprochement between China and Russia in the midst of a gruelling on-going war in Ukraine only serves to heighten the prospect of a menacing East/West divide. Following yesterday’s announcement of a 25 basis point increase in interest rates, the ninth in the current cycle, the US Fed seems less concerned with the potential damage this may continue to visit on regional banks than it is with the fight against inflation – even at the risk of pushing the US economy into recession in the process. It’s a fine balance between defeating inflation and the risk of further bank failures and economic recession.
Against this backdrop it seems we could see a low growth market outlook for the rest of the year. There will be opportunities – there always are – and it will be up to the various fund managers to exercise their skills in uncovering them. In this regard it is comforting to know that our partners, Morningstar, are more than capable of analysing the performance of the managers with whom we are invested in our portfolios.
Amidst all the economic focus and the geopolitical tensions, it’s easy to forget about the ongoing battle against the effects of climate change – especially the need to move away from fossil fuels which is proving problematic for countries such as South Africa.
Certainly, plenty to think about but we do remain positive for the future despite these uncertain times.