Q1 2023 Economic Review: What Moved the Markets?

Disclosure: This article is posted to inform readers and not to provide financial advice.

In this Economic Review blog, we look back at the first quarter of 2023 and consider events that moved the markets. With 2022 in the rearview mirror, what are some of the key global and local economic factors to be aware of, especially when it comes to investing? Here we summarise developments, financial data, and major events that impacted the economy globally and locally in Q1 2023; and consider trends and predictions for the rest of 2023.

What is an Economic Review & Why is it important?

Our team at TVC Health and Wealth Managers helps you make sense of each quarter by releasing a review blog providing an easy-to-understand analysis of what happened economically in South Africa and globally during that time. (You can read last quarter’s economic review here.) Assessing the performance of the economy is key to understanding the world around us, and is especially noteworthy for those interested in growing their wealth!

In this TVC Economic Review we reflect on the first quarter of the year and recap what moved the markets in Quarter 1 2023: 

Summary: Global & Local Markets

We entered 2023 with a close eye on inflation and the hopes of a positive bounce-back with Covid-19 now officially at our backs, even as global political unrest persists. At the start of quarter 1, the global economy saw positive signs as inflation and energy prices eased from peak levels. Then China ended its zero-COVID policy, offering hope for a boost to global growth.

The most enduring economic challenge of 2022 was the relentless rise in inflation, which started late in 2021. In 2023, inflation is still of grave concern globally. Fortunately, the United States Federal Reserve has indicated its commitment to bringing it inline and the component drivers of the post-Covid surge in inflation have started to normalise. The below graph shows how there has been some easing of headline inflation – but core inflation has yet to peak, remains elevated, and may persist:

Image source: OECD Economic Outlook, Interim Report March 2023

In Q1 the collapse of Silicon Valley Bank in the U.S. and uncertainty around the security of Credit Suisse in Europe raised some major concerns about financial rising vulnerabilities. However central banks seemed able to contain the problem, with the stock market weathering the storm and rallying in the aftermath.

A global recession was avoided at the end of 2022 – seeing global equities gain in Q1 – but recession indicators remain quite elevated. Growth stocks outperformed value in the quarter. Global political dynamics and the high uncertainty created by the war of Russia’s invasion of Ukraine still take a heavy toll on activity, as trade tensions are high and could worsen.

On the local front, South Africa’s outlook remains bleak as the energy crisis has intensified, and crises are looming in other areas of basic infrastructure like water and transport. The country was ‘grey-listed’ in February by the Financial Action Task Force, due to its inability to sufficiently combat money laundering and terrorist financing. The National Budget Speech did offer some solutions, but carry-through will be crucial.

Overall, the local and global economic environment is likely to remain challenging for businesses and consumers in 2023.

Global Markets

Inflation & Interest Rate Hikes:
There were further interest rate hikes in Quarter One, but to a less extreme degree, indicating that inflation pressures were weakening. Central banks stayed committed to returning inflation back to target ranges.

  • In the United States:
    In Q1 The Federal Reserve (Fed) raised rates twice, and data indicated that inflation is cooling.
    As the second-largest bank in the United States failed and as US inflation remained too high, in March 2023 The Fed raised its funds rate another 25 basis points (bps) to 4.75%-5% – pushing borrowing costs to their highest levels since 2007. This change in rate hike expectation led to the US dollar being weaker against most of the other ‘G-10’ – a group of the 11 leading industrial countries. Subsequently, however, signs of easing inflation have raised hopes that the hiking cycle could soon come to an end.
  • In the United Kingdom & Europe:
    In the United Kingdom, the Bank of England (BoE) raised its key bank rate by 25bps in March – in line with market expectations – and its latest quarterly forecasts indicate expectations of a recession later in 2023. The European Central Bank raised interest rates by 50 basis points in both February and March, with Eurozone inflation declining to a one-year low at the end of the quarter. Despite volatility in the banking sector, Eurozone shares notched up strong gains in Q1.

Global Growth Forecasts:
The International Monetary Fund (IMF) – a major financial agency of the United Nations – raised its growth forecasts for 2023. However, their World Economic Outlook for 2023 is characterised as a ‘rocky recovery’ with ‘risks tilted firmly to the downside’.

This global growth outlook is due to the high costs of living, rising interest rates, and ongoing geopolitical uncertainties, denting private consumption and investment. In real terms, the global economy is forecast to grow by 2.3% in 2023 (the weakest growth since 1993, not counting the recession years of 2009 and 2020).

Bank failure
Perhaps the most significant theme of quarter 1 was the prospect of a global banking crisis, raising concerns around liquidity. Dominating news headlines was the sudden collapse of Silicon Valley Bank (SVB) and Signature Bank in the United States, and then the acquisition of Credit Suisse by UBS in Switzerland. This in turn prompted a rise in financial market volatility and reintroduced concerns about broader financial stability.

However, calm seems to have since been restored, as investors seem convinced that central banks contained the problem. In March, growth stocks rallied on the back of falling bond yields, helping global financial markets close Q1 more firmly. Investor optimism led United States stocks higher over the quarter. It remains to be seen whether this proves to be a one-off problem or a systemic problem.

Recession risk
When it comes to developed markets, the threat of recession seems to have been evaded to date. Europe and the United Kingdom actually saw stronger activity data than expected at the end of 2022, but recession indicators remain quite elevated. Similarly, many strategists believe that the United States will tip into recession by Q3.

China is back
On the bright side, quarter 1 saw the reopening of China, off the back of the relaxation of the country’s COVID policy last year. China’s economy continued to show signs of recovery – supporting metal prices – while inflation has remained surprisingly low.

Polarising Global Political Alignments Strengthen
It is also worth noting that the conflict in Ukraine has brought western, NATO (which refers to The North Atlantic Treaty Organization, an intergovernmental military alliance between European and North American member states), and NATO-aligned countries closer than they have been in several decades.
On the other hand, several larger emerging markets historically more aligned to Russia, have resisted outright condemnation of Russia, and instead remained open to engagement and business. This includes the continued commitment to the BRICS grouping by the likes of members China, India, Brazil, and South Africa.

The Global Indexes
Developed markets outperformed emerging markets (EM), despite renewed optimism at the start of the year given the re-opening of China’s economy.
This is demonstrated by the MSCI indexes – which are market cap-weighted indexes (stocks weighted according to their market capitalization):
– The MSCI All Country World Index returned +6.8% for the quarter
– The MSCI World Index returning delivering +7.9%
– The MSCI Emerging Markets Index +3.5%. *

*All returns are quoted in U.S. dollars.

Thanks to the prospect of increased economic activity out of China, industrial metals were broadly positive; gold advanced on the back of safe-haven demand, and precious metals achieved price gains. Oil prices were modestly lower, with energy and livestock the worst-performing components of the index.

Global Equities & Bonds
Global equities gained in Q1, buoyed by receding recession worries in developed markets.
Even as volatility in the market has remained historically high, bonds generally produced positive outcomes in the first quarter

Stocks/ Industries
When it came to stocks, energy and healthcare sectors lagged the most over the quarter, with technology stocks making some of the strongest gains. This indicates a reversal of trends on a sector level. Manufacturing activity grew in February, while non-manufacturing PMI (which stands for Purchasing Managers’ Index) peaked to its highest reading since 2011.

Image source: IMF

Local Markets

Inflation/ Interest Rates in South Africa
Headline inflation has eased locally, with CPI at 7.1% in March from a peak of 7.8% in July 2022 – but, much like our developed market counterparts, core inflation has risen steadily and is still well above target. In March 2023, the South African Reserve Bank raised rates by a higher-than-expected 50 basis points in its efforts to cool inflation. While this means that the South African money market has become a saver’s haven, local businesses and consumers are feeling the pressure.

SA’s energy crisis – & other basic infrastructure concerns
The most critical development in South Africa quarter 1 has been the escalation of ‘home-grown’ crises; across energy, water and transport infrastructure. The national energy crisis has seen a marked deterioration, which continues to weigh on economic activity and growth forecasts. The surge in high-stage loadshedding since December has meant that up to 6 000 MW is cut from the grid and sees power outages twelve times over four days; considerably more challenging to manage from a business perspective.

Mining and manufacturing are likely to be among the worst affected – but no industry is spared. Recent corporate financial reporting has shown how South African companies have had to reallocate billions of rands towards the high costs associated with loadshedding. Loadshedding has even affected the price of food, as seen in the below graph:

Image source: Allan Gray, Statistics South Africa

In response, rating agencies now see South Africa’s low growth potential as a key credit weakness. American credit rating agency Standard & Poor’s downgraded South Africa’s sovereign credit rating outlook from ‘positive’ to ‘stable’. The International Monetary Fund (IMF) has projected a sharp deterioration in the country’s near-term growth outlook., hamstringing the country’s efforts to claw back its investment-grade rating.

Water, Transport Crisis
Additionally, an emerging water crisis is attracting attention, highlighting system failures that threaten water security. The business sector is suggesting that both water supply and quality are becoming a major issue in their operations as local water-pumping stations suffer from pressure issues caused by loadshedding.

As Transnet’s rail infrastructure is disintegrating owing to poor maintenance and theft, national transport networks are also coming under increasing pressure. We’ve also seen deficits in Transnet’s port services.

On the bright side, South African corporate sector has proven remarkably resilient through these various crises and we have seen many private sector renewable energy projects accelerated, as they take on self-generation where possible, thanks to more friendly government policy. We’ve also seen several municipalities making use of regulatory changes to procure power independently of Eskom.

Weak currency & Greylisted
South Africa’s currency is the third worst-performing emerging market currency in 2023 and is trading at a significant discount to its fair value. The country was also ‘grey-listed’ in February by the Financial Action Task Force, due to deficiencies in its processes to combat money laundering and terrorist financing.

Budget Speech
In February, South Africa’s Minister of Finance presented the 2023/2024 Budget. Key takeaways were:

  • We saw a steady consolidation of the post-pandemic fiscal deficit from -9.8% of GDP to -4.5%e in 2022/2023. 
  • National Treasury expects to achieve a small primary (non-interest) surplus, which it intends to grow through the medium term. 
  • Treasury also projects ongoing consolidation in the budget balance towards a -3.3% deficit in 2025/2026. 
  • Debt relief will be granted to Eskom
  • Debt is expected to be driven from 68% of GDP to a peak of 73.6% in 2025/2026, and then start a slow fall.
  • National Treasury forecast an increase in tax revenue of 6% per year on average over the next three years.

However, in the absence of stronger growth, and considering challenges such as failing infrastructure and struggling SOEs, the outlook remains bleak.

South Africa’s GDP and Economic Growth
According to data from Statistics South Africa, the country’s GDP decreased by 1.3% in the fourth quarter of 2022, but data shows a mild rebound is expected in Q1.
Treasury forecast that GDP would expand by only 1.4% over the medium term, and that the South Africa’s economy will grow by 0.9% in 2023 (and recover slowly to 1.8% by 2025).

South African equities
Within South African Equities, industrials fared the best, but with performance partially offset by weaker returns in the resources sector. Both South African Bonds and South African Cash had a positive quarter.

The Indexes (South Africa)
The FTSE/JSE Indices represent the South African equity market and its market segments, with the acronym FTSE referring to The Financial Times Stock Exchange and the JSE standing for Johannesburg Stock Exchange.
For the first quarter of 2023, the FTSE/JSE All Share Index gained 5.2%. Industrials went up 13.6%, although financials lost 0.3% and resources closed 4.7% lower. The JSE All Bond Index gained 3.4%, and listed property lost 4.8%. See expanded in the table below:

Image source: Bloomberg

Investment into the country
Recently at the South African Investment Conference (SAIC) it was announced that the objective of attracting R1.2 trillion in private sector fixed investment in South Africa was exceeded, with investment commitments instead reaching a reported R1.51 trillion for the 5-year period. However, significant evidence of progress in infrastructure improvement is urgently needed for improved business confidence.


Looking forward
As the second quarter gets underway, many are wondering if the banking scare will have a knock-on effect on the global economy and trigger a recession. The world currently faces a broad-based cost-of-living crisis, aggravated by continued supply chain disruptions.

Even with a potentially friendlier-than-expected interest rate outlook, we also still face considerable inflation risks. Central banks are now faced with the difficult task of navigating an appropriate policy path, given the delicate balance needed to contain rising core inflation. With the second largest in the world, China, beginning to reopen its economy, this means improving growth prospects around the globe. Despite recent signs of improvement, it is expected that global recovery over the next two years will be moderate.

In South Africa, an urgent action plan to address the national infrastructure crisis is key to getting us on a more positive track for economic growth. While there are building blocks in place, what is now needed is urgent, disciplined, and dedicated execution.

Investor Perspective
General sentiment remains bearish among investors – on the plus side, this usually means asset prices are cheap.

Remember the golden rules of investing:

  • Staying invested allows you to reap the rewards of compound interest.
  • Investing requires a well-thought-out strategy, and sticking to it.
  • Staying the course is how you achieve better investment returns over time.
  • Don’t get distracted by the short-term noise or the lure of short-term gains.
  • Making withdrawals in an emotional response can erode returns over time – as illustrated in the below graph:
Image source: Allen Gray

History shows that the markets have faced these kinds of issues before throughout history, and there is always opportunity for the investor. At TVC Wealth and Health Managers, we know how tough it can be when volatility peaks. 

Working with a professional Financial Advisor is the surest way to make your money work for you and accumulate wealth. Contact us today! (via our message form or drop us a WhatsApp via the ChatBox below)

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