Global markets resumed in January on a positive footing resuming the ascent that they began in October and November last year taking a short pause for the festive season in December. The S&P 500® was up 6.18% (USD) in January, bringing its one-year return to -9.72%. It was the first January gain after three consecutive years of January declines. The tech-heavy Nasdaq-100 (NDX) started the new year off strong despite the various economic and geopolitical headwinds it faces, gaining 10.6% (USD) in January. This rally marked the strongest January on record going back to 2001 and the best single month return since July of last year. This trend was seen across all global markets which started 2023 on a strong footing with gains across all major global equity classes. China’s re-opening after dropping the zero-Covid policy in late December helped propel the advance. Signs that inflation is easing from its autumn highs in several major regions also supported sentiment, amid hopes central banks may be close to the peak of their rate hiking cycle. The global market rally was largely driven by hopes that pricing pressures were tamed, central banks would ease their aggressive rate hikes and even potentially pivot later in the year, and that the global economy would avoid a hard landing or prolonged recession.
The Fed continues to signal that it will be data-dependent and has acknowledged that we’ve started to see some disinflation in certain sectors. As a result, the Fed has continued to slow down the rate hike increases from 75 bps to 50 bps, to just 25 bps in February. Inflation has eased for the sixth successive month in December. The consumer price index (CPI) dropped to 6.5% from 7.1% mainly due to energy and food cost moderation. The inflation data led investors to position for slower rate rises from the Federal Reserve. The reversal in sentiment touched the majority of the market, with almost all sectors stronger over the month.
The strongest gains in January were in favor of more growth-oriented names. The prospect of less restrictive monetary policy and a weakening economy boosted demand for bonds and caused US Treasury yields to fall, particularly at the long end. That provided support for growth stocks. Falling energy prices dampened momentum in the energy sector and the market rally weighed on the relative performance of defensive sectors like healthcare, utilities, and consumer staples. A relatively warm winter in Europe has softened demand for natural gas and continues to temper energy prices. The relatively benign outlook for global energy prices continues to place downward pressure on global CPI.
US employment data revealed an economy in much better shape than had been widely thought and prompted a big reappraisal in forecasts for the Federal Reserve’s fed funds rate. The implicit judgment of the bond market grows ever more emphatic that the Fed will be cutting rates soon, even if it raises them more in the short term. The US economy expanded by an annualized 2.9% q/q in Q4 2022, beating market forecasts of 2.6%. Data out of the US at the start of the year showed continued gains in the labor market. However, there are also indications of some wage normalization through a slowdown in average hourly earnings. The Fed continues to signal that the federal funds rate should reach a peak slightly above 5%, while markets expect rates to top out at around 4.9%.
Meanwhile, bond yields fell, leading the Global Aggregate bond index to rally by 3.2%. Interestingly, the correlation between equities and bonds remained positive, like last year, but the asset classes moved together in a much more pleasing direction for investors. The bear market in stocks and the crash in bonds in 2022 have created an attractive entry point for investors in both asset classes, from a long-term perspective. So far, January has shown that after a difficult 2022, and with inflation now falling, both equities and bonds can deliver positive returns for investors. Nevertheless, opportunities and risks remain.
In South Africa, the FTSE/JSE All Share Index and Capped SWIX rose 8.9% and 7.0%, respectively to close the month in positive territory mainly due to renewed optimism around China’s economic growth prospects. All major sectors closed the month higher, with financials gaining 3.9%, industrials 12.8% and resources 6.3%. The JSE All Bond Index gained 2.9%, while listed property (JSE ALPI) closed the month lower at -0.8%. Naspers followed global markets higher as they rose 18% in January. The Rand weakened by -2.1% against the US dollar. The rand was one of three major currencies to weaken against the US dollar in January. The South African Reserve Bank raised the repo rate by 25 bps to 7.25%. The smaller than expected rate hike further lifted investor sentiment. The reserve bank expects headline inflation to continue its trajectory towards the midpoint of its 3-6% target band over the next two years. The South African Reserve bank highlighted rolling blackouts and other logistical constraints as key risks to economic growth. 752 hours of load shedding has already occurred during January 2023 – this equates to 20% of the total loadshedding hours experienced during 2022. The SARB’s latest GDP forecast now sees the economy expanding by just 0.3% (vs 1.1%) in 2023 and 0.7% (vs 1.4%) in 2024. In 2022, the country’s trade surplus shrank to R193.3bn from R431.7bn in 2021.
All performance figures in ZAR unless otherwise stated.
View from Alpine
We suspect that the U.S. stock market might have started a new bull market, but price advances will continue to be volatile and hesitant in the early part of 2023. The Fed cannot declare victory over inflation and tight policy will be maintained. Overall, we feel it prudent to be slightly overweight bonds in the first quarter of 2023. If inflation continues to drop quickly, we will recommend a switch to being overweight stocks as the Fed will likely accelerate its dovish pivot, which will boost economic growth (and thus profit) expectations.
Alpine Macro Research is a leading Macro research and economics house who Iza rely on for their Macro trends and general market themes
The Iza Portfolios
The Iza Global Equity Fund gained 3.03% in January. while the Iza Global Balanced Fund gained 3.02%. and the Stable Model Portfolio rose by 2.77% for the month (All GBP returns)
Looking at the underlying fund managers we find that Smithson and Liontrust were the fund’s largest contributors gaining 7.3% and 4.8% in the month of January. The fund’s largest holding Fundsmith Equity fund gained 1.50% for the month. Fundsmith’s top 5 contributors in the month were IDEXX, LVMH, L’Oréal, Meta Platforms and Amadeus. The top 5 detractors were McCormick, Automatic Data Processing, Waters, Pepsico and Microsoft. Scottish Mortgage’s largest holding Moderna has received better than expected results from their experimental cancer vaccine. “Better than my highest expectations” is how Moderna CEO Stephane Bancel described the phase two data.
The experimental cancer vaccine, in combination with Merck’s immunotherapy drug Keytruda, reduced the risk of death or recurrence of melanoma in high-risk patients by 44 per cent compared with treatment using just Keytruda. Moderna and Merck plan to launch a phase three trial in 2023.
As we continue to actively manage the Portfolios, we have bought a new position in Berkshire Hathaway Inc and Dodge & Cox Worldwide Global Stock Fund. We believe that the new positions will complement the existing funds within our portfolios, and they will add diversification given the current Marco environment and market volatility.
Funds’ Performance Summary
The US labour market has seen a large jump in corporate layoff announcements. Still, these headlines do not necessarily translate into a weak demand picture: 1) layoffs have been primarily concentrated in the technology sector; 2) the layoff rate and unemployment rate both remain below pre-pandemic levels while the job openings rate remains above pre-pandemic level; and 3) the job finding rate remains resilient in all industries, including technology.
Source: FRED and Goldman Sachs Asset Management
In January this year, Tesla made the announcement that it would be cutting prices on its vehicles by as much as 20%. Tesla’s price cuts are an attempt to protect its market share. Tesla’s margins are significantly higher than those of its rivals, both in terms of gross and net profit. Tesla is going on the offensive by reducing its prices—a move that puts pressure on competitors.
Source: Visual Capitalist and Reuters