May 26

Financial Markets Commentary


Orion Investment Managers provides a suite of asset management services to Warwick Wealth clients. Orion Investment Managers Managing Director and Chief Investment Officer, Adrian Meager, provides insights into the international and local financial markets.

International Markets

World markets recorded a strong start to the second quarter of 2023, notwithstanding the continued spectre of high inflation, which continues to loom and raising fears of a possible US recession. This sentiment was further exacerbated by concerns over rising US-Sino tensions, with US listed Chinese shares losing more than US$100bn in market value against this backdrop. Continued pressure on the US Banking sector, as well as a possible default by the US also weighed on sentiment.

Despite these concerns, US markets ended the period firmer with the S&P 500 up by 1.5%, the Dow Jones up by 2.5%, and the Nasdaq up marginally by 0.04%, as tech company earnings dominated the last week of the month, with results coming in better than expected. On the economic front, US headline CPI was lower than anticipated at 5.0% YoY vs the 6.0% YoY for February, while annual core CPI came in at 5.6% YoY vs the previous reading of 5.5% YoY. In addition, retail sales declined by 1% MoM, which was worse than the restated drop of 0.2% MoM for February, with sales of electronics and vehicle sales leading the decline. Personal consumption expenditure, the Fed’s preferred measure of inflation, rose 0.3% MoM in March, which is unchanged and in line with the consensus number, while the GDP print came in at 1.1% YoY, vs the consensus number of 2% growth YoY and the fourth quarter 2022 print of a 2.2% YoY increase. As a result, sentiment is leaning towards the Fed possibly coming to the end of its rate tightening cycle. Rhetoric from the Fed’s March meeting forecast a possible ‘mild recession’ because of a reduction in lending, which would weigh on growth.

European markets followed the US broadly, with the UK bouncing 3.1% for the month after the decline in March. The UK inflation number fell less than expected, however, printing at 10.1% YoY vs the previous February number of 10.4% YoY, with rising food (record increases in the bread and cereals category) and alcoholic prices being the main drivers, rising by 19.1% YoY.

In Germany and France, the Dax, and the CAC, also ended April stronger, closing 1.9% and 2.3% respectively. Inflation in Germany slowed, printing at 7.4% YoY vs the previous reading of 8.7% YoY. This is mitigated, however, by the continued rise of food prices, up by 22.3% YoY. The slowdown in the inflation number was brought about by a decrease in energy costs, which rose only 3.5% YoY. In contrast, French inflation increased to 5.9% YoY vs the consensus number of 5.7% YoY. In the Eurozone, inflation printed at 6.9% YoY, lower than the February reading of 8.5% YoY, while GDP grew by 0.1% QoQ, for the first quarter, just missing the consensus forecast of 0.2% QoQ, while the YoY number of 1.3%, also came in below consensus at 1.4%.

Asian markets experienced a mixed period. In China, the Shanghai Composite ended the month firmer by 1.5%, with the Hang Seng pulling back by 2.5% over the same period. Economic data out of China for the month saw an unexpected fall in factory activity, as the official PMI number came in at 49.2, vs. the March reading of 51.9. Meanwhile, the non-manufacturing PMI (a measure of business sentiment), also tracked lower, coming in at 56.4, vs the previous reading of 58.2. Notably, the 50-point-mark separates contraction from expansion. In addition, China’s holdings of US treasuries dropped to their lowest level since 2009, from $867.1bn to $859.4bn, as yields continued to decline due to the Fed’s interest rate increases for the year, a reduction in their dollar allocation, possibly in response to US sanctions on Russia.

The Japanese market ended the month stronger by 2.9%. As markets anticipated, the rates setting meeting by the BoJ in April did not deliver any changes, with the BoJ holding the rate between a negative 0.1% and 0.5%, with rhetoric from the bank confirming the stance that it will continue its yield curve control policy and quantitate easing for now.  The BoJ continues to remain cautious about any moves that could be construed as a premature withdrawal of monetary support, as rates hikes in 2006 and 2009 were criticised for inducing a recession. Concerns remain that inflation could sustainably reach 2% in the foreseeable future with companies offering significant pay hikes during this period. The inflation reading came in at 3.2% vs the previous reading of 3.3%, while core CPI rose 3.1% vs the previous reading of a 3.1% rise in February.  

South African Market

In keeping with international markets, the local market performed well, largely driven by resources, specifically the gold mining sector, with the ALSI closing the month firmer by 2.8%. The Resi-10 was at the vanguard, gaining 4.2% for the month (Goldfields up by 19.9%, Amplats by 13.6% and Glencore up by 5.7%), followed by the property sector up by 3.8%, and the industrials up by 3% and financials by 1.3%.

On the economic front, there was an uptick in headline inflation numbers rising to 7.1%, as food price increases remain stubbornly high, with significant increases in the price of milk, eggs fruit and vegetables. For the third month in succession there was a decline in retail sales, coming in at -0.5% YoY, following the January decline of 0.8% YoY, while the monthly print also declined by 0.1% vs the previous reading of a 1.5% decline for February. the lack of power generation due to Eskom’s inability to provide a consistent supply of power (capacity to provide 48 000MW, and reliably only 27 000MW, meandering between 23 -25 000MW) continues to negatively impact the economy. The new Electricity Minister, Dr Ramokgopa, proposed a plan to add around 4 000MW of additional power to the grid, which may not be enough, however, as the risk to growth continues. The most optimistic to pessimistic grow forecasts for South Africa range from 0.4% (Reuters Consensus), 0.2% (SARB), and 0.1% (IMF). Despite this and the previous round of rate hakes, the Forward Rate Agreements (FRA’s) are again anticipating a 25-basis point increase at the May MPC meeting, to combat above-target inflation. The general sentiment is that we are nearing the top of the interest rate hiking cycle, with most commentators opining that more aggressive rate hikes from this level would further hamper already weak economic growth.