Quarterly market performance reveals volatility despite positive returns

South Africa experienced a promising market performance during the first quarter of 2023, with various asset classes showing positive returns. However, these favourable outcomes mask underlying challenges that are expected to persist in the near future.

According to Samir Narotam, Portfolio Manager at leading wealth and financial advisory business GTC, "Despite the apparent positivity, considerable market volatility and economic uncertainty continue to be prevalent. Global trade expectations remain subdued, and fears of a global recession persist. The implementation of increasingly restrictive monetary policies by global central banks, driven by concerns over sustained inflation, has contributed to market turmoil since the beginning of 2022."

Highlights of the quarter:
• Although concerns about the impact of the international banking sector sell-off on local banks caused some unease, local equity markets ended the quarter with a 2.4% increase. The early-year excitement surrounding China's increased participation in global trade, following self-imposed lockdown restrictions in 2022, contributed to this growth.
• Supported by the euphoria around China, the local industrials sector rallied by 13.6%, with notable returns of 10% and 12% from Naspers and Prosus, respectively.
• The resource sector experienced a decline of 4.4% amid output-linked concerns surrounding Eskom and Transnet's operating capabilities.
• The local property sector retracted by 5.1%, while the financials sector ended the quarter flat with a 0.4% increase. Financials experienced a decline of 5.8% in the month of March amid the international banking sector sell-off.
• Developed markets saw a strong quarter with a 7.7% increase, while emerging markets grew by 4.0% in US dollar terms.
• The US dollar also strengthened by 4.7% relative to the ZAR, providing a further tailwind for offshore asset returns when converted to ZAR.
• The South African Reserve Bank (SARB) raised interest rates twice, bringing the repo rate to 7.75%. This represents a total interest rate hike of 3.75% since the start of 2022 in their efforts to combat inflation. Although South African headline inflation remained above the SARB's target range of 3% to 6% at 7.0%, it showed signs of stabilisation after peaking at 7.8% in July 2022.
• US headline inflation reached 5% for the year ending February 2023, while the European Union continued to struggle with a CPI of 9.9%. In response to elevated inflation, the US Federal Reserve (FED) increased interest rates by 0.5% to 5.00% over the three months, while the ECB raised rates by a total of 1.00% to 3.50%.
• Local bonds outperformed local cash, with the markets delivering returns of 5.68% and 1.57% respectively.
• Global bond markets ended the quarter with a 3.5% increase in US dollar terms. However, this rally was insufficient to offset the significant negative returns of the preceding nine months, resulting in a one-year return of -9.6% in dollar terms.

Narotam concluded, “Significant headwinds persist which cloud the hope for a strong global economic recovery in 2023. Demand for safe-haven asset classes remained strong as investors became increasingly troubled by global economic growth prospects. All this necessitates continued caution in portfolio positioning. Amid the challenging global backdrop GTC remains cautious in our portfolio positioning as we navigate through this market cycle. GTC has always maintained that remaining invested, in line with one’s investment objectives, is a key component in achieving one’s financial goals.”