Investment markets

Markets in South Africa performed well in Q4 of 2022, but all major asset classes gave returns below inflation for the year. Equities gave lower returns than bonds and cash, with the JSE All Share Index (ALSI) returning 4.0%. Financials (8.6%) and Resources (9.5%) were able to beat inflation (7.2%) in 2022 while Industrials produced a negative return (-3.5%).

SA markets enjoyed positive returns in Q1 and Q4 in 2022. In the US, the S&P 500 experienced positive returns in Q4 of 2022 but all major indices experienced double-digit losses in US dollars for the year. The S&P 500 was down 19.44% in dollar terms but in rands, it was only down 12.7%. The difference of almost 7% can be attributed to the Rand/dollar weakness over the year.

Globally, the energy sector remained the standout performer last year propelled by the war in Ukraine as well as massive shortfalls in production capacity for energy-related commodities. Energy was the only major subsector in the US to post a positive return for the year (+59%) with utilities in second place at -1.5% and consumer staples and healthcare at -3% and -3.5% respectively.

Gold rallied around 10% in Q4 to post a gain in line with inflation for the year, while platinum enjoyed a strong rally of over 14% albeit off a low base at the start of 2022. Demand for catalytic converters as well as potential hydrogen fuel cell technology has been key drivers of the PGM basket.

The dollar remains a key driver of risk appetite. With a more hawkish FED relative to other central banks, a strong dollar view remained a dominant theme throughout the year. The rand depreciated against the dollar (7%), the pound (4.6%), and the euro (0.6%) in 2022, although there was considerable volatility during the year.

Economy

In an update from Q4 released early in 2023, the IMF revised their estimates for 2022 growth higher across the board except for China. This was largely due to the prolonged impact of the hard COVID lockdowns on that economy.

However, China’s growth has been revised sharply higher in 2023, while the UK has been revised sharply lower. The Ukraine war on Europe’s border contributed to heightened risk and a muted economic growth outlook.

Revisions to US growth have generally been positive although the 2024 estimates show growth lagging previous estimates.

Emerging markets (EM) growth was revised slightly higher across all three years. Emerging markets are expected to continue holding their own as many continued to benefit from higher commodity prices. Energy producers were revised sharply higher in 2022 but are expected to moderate sharply in 2023 as energy prices are expected to normalize.

South Africa’s growth was revised sharply higher to 2.6% in 2022. While better-than-expected trade data filtered through to the current account and hence, GDP, we believe that SA’s challenges remain pronounced. This is reflected in the IMF’s 2023 estimate for SA growth at 1.2%, sharply lower due to load shedding but remains significantly higher than the SARB’s most recent estimate for growth in 2023 of only 0.3%. The impact of load shedding is acute and likely to remain a hard cap to growth in the medium term. The SARB estimates that it detracts as much as 2 percentage points from SA’s potential economic growth.

Inflation

Inflation remains a significant risk to markets globally but appears to be peaking. In South Africa, headline inflation peaked at 7.8% in July 2022 and subsequently trended lower to 7.2% in December 2022. The profile of the decline was somewhat different in the US, where inflation peaked in June at 9.1%, and has trended lower for each successive month, ending the year at 6.5%.