January was on the RISE as Markets Rally!

What's ON THE RISE? Check out the latest news from RISE's monthly  commentary 

Global Markets

• Global markets started the year on a good foot after a dismal performance in 2022.

Local Markets

• Industrials were up 13.4%, Financials and Resources were up 4.0% and 7.1%, respectively.

Emerging Markets

• Emerging market stocks grew in January due to risk-on sentiment and various favourable factors.

Rand remains weak

• The South African rand weakened by 2.2% against the US dollar.

Markets started 2023 with a broad-based rally, reinforcing the “January Effect” a phenomenon where market participants start the year with a positive attitude, and stock prices tend to rise more than any other month of the year. This comes after a dismal performance in 2022. Besides improved sentiment, markets benefitted from signs of inflation easing across developed markets, reinforcing expectations that central banks will soon reverse the interest rate hikes which started in 2022. 

Outlook of SA Macroeconomic environment

The S&P 500 ended the month up 6.2% in USD, the MSCI World Index ended the month up 7.1% in USD, whilst the MSCI Europe ended the month up 8.7%, and the MSCI Emerging Markets ended the month up 7.9%. The Bloomberg Barclay’s Global Aggregate Bond Index also rallied 2.1%

The change in sentiment benefited the majority of equity sectors, with cyclical sectors outperforming traditional defensive areas of the market. Europe outperformed its peers on the back of improved supply chains with China after China abruptly ended its zero-covid policy late last year. Fears over an energy crisis receded due to a relatively mild winter, which also contributed to the outperformance of Eurozone stocks.  The price of natural gas was 55% lower than the average price in the second half of 2022. Inflation fell to 9.2% year-over-year (from 11.1%) which is the second consecutive fall in inflation and the lowest print in 5 months.

US Inflation fell from 7.1% to 6.5%, which was mainly attributed to lower energy and food costs. The market is now positioning for slower rate hikes from the US Fed with expectations of a 0.25% rate hike in February, which thus resulted in the U.S. Dollar closing lower for the fourth consecutive month and down 10.5% from the September high of $114.

Chart Source: Infront

The weaker dollar also contributed to supporting the gold price alongside optimism following China’s reopening. Gold may now also be starting to benefit as a safe-haven asset reaching 8-month highs. It has been rallying since November (17%) on the back of economic growth concerns and looming recession fears for Europe and the US.

Emerging Markets
Emerging market stocks saw growth in January due to risk-on sentiment and various favourable factors such as optimism that inflation has peaked in the developed world, recovery of the Chinese economy such as ongoing re-opening of the economy, easing of regulatory pressure on the internet sector, more policy support for the real estate sector and better-than-expected Q4 GDP growth of 2.9% year-on-year. These factors led to the MSCI EM Index outperforming the MSCI World Index during the month.

Chart Source: BCA Research - Chinese investable stocks have benefited more from Beijing’s reopening plans and pro-growth policy pivot than their onshore peers.

Local Markets
SA markets were off to a great start in 2023, benefiting from risk-on sentiment globally. The FTSE/JSE SWIX rose by 7.2% MoM. The boost in market performance was largely due to renewed optimism around China's economic growth prospects, which directly impacted the share prices of Naspers and Prosus. All sectors of the market experienced gains in January. Industrials (up 13.4%) was the top performing sector, driven by strong gains on Naspers and Prosus, averaging 18% for the month. Financials and Resources were also up 4.0% and 7.1%, respectively.

Chart Source: Infront, 6-month performance - Naspers and Prosus 

The JSE All Bond Composite (ALBI) ended the month up 3.0%. South Africa’s 10-Year Government Bond Yields followed global bond yields lower in January.

Rand Remains Weak

Despite a generally soft month for the US dollar against most currency pairs, the South African rand weakened by 2.2% against the US dollar. The rand was negatively impacted by the ongoing electricity crisis, concerns over the economy's growth prospects, and the South African Reserve Bank's decision to hike interest rates by 0.25%.

SARB hikes by 0.25%

The MPC's decision to only raise rates by 0.25% instead of the expected 0.5% was in line with the trend of inflation moving towards the target level of 4.5% YoY and the consideration of the potential harm a more rapid rate hike could have on the economy. This more cautious approach by the MPC helped to ease concerns and support overall economic stability. It is expected that the SARB will increase the interest rate by a further 0.25% in the March meeting, and thereafter we expect the rate to remain flat

Closing comments from Duane Gilbert, RISE Portfolio Manager

"At face value, January looks to cement the idea that markets are recovering. However, we see January as the late stages of the bear market rally that began in October 2022. Fundamentally, the market environment remains unsupportive of equities - inflation remains elevated, growth is slowing, liquidity is declining, and geopolitical risks are high. Markets are optimistic about the Fed hiking interest rates by 0.25% instead of 0.5% and China's reversing of their strict zero-covid policy. However, we believe that a slowdown in the Feds' pace of hiking interest rates is not a waver in their commitment to fighting inflation and that China's abandonment of their zero-covid policy is not enough to cause meaningful growth and infrastructure spending by itself. As a result, we maintain a conservative positioning in our portfolios. Our exposure to global equities is low. Within equities, we have taken a more defensive stance, favouring US quality equities and defensive sectors.

South African equities are particularly cheap but vulnerable to a global sell-off. One needs to carefully pick companies that can grow their earnings in a low-growth environment. Our portfolios have a high allocation to SA Bonds (where longer-dated instruments are still offering double-digit yields) and exposure to commodity-backed loans. We also hold a lot of cash in our portfolios. We prefer USD over ZAR, given the recent pullback in the dollar index and the countercyclical nature of the dollar. Our large cash position gives us the dry powder we need to take advantage of bargains that may arise from market sell-offs. Finally, we have a position in renewable energy infrastructure projects, which are attractive from an IRR perspective and will meaningfully increase electricity production and reduce carbon emissions in South Africa."

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RISE Growth Passive Fund    
RISE CPI+7 
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RISE CPI+5 

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Sources – Intellidex