The first quarter of 2023 has been marked by significant uncertainty and market volatility as investors considered the course of inflation, the direction of central bank interest rates, the stability and integrity of financial systems, as well as. the strength of corporate revenues and earnings in a weakening macro-economic environment. While investors didn’t suddenly get clarity on all the issues in April, this past month was marked by less volatility and some modest market gains, with investors turning their focus toward the economic impact of the Fed’s year long series of steep rate hikes.
The global economy showed positive growth in April, with economic data revealing surprising resilience in the face of higher interest rates. The U.S., Eurozone, and UK Purchasing Managers Index (PMI) surveys exceeded expectations, while China's Q1 GDP print beat estimates. The inflation picture continued to moderate across developed markets, with falling energy prices contributing to lower CPI prints in the U.S. and Eurozone. Oil in particular should continue to drag on inflation in the coming months due to the high base set in 2022, even after OPEC+’s recent production cut announced at the beginning of April.
On the market front, developed market equities (MSCI World) advanced 1.8% over the month, boosted by positive economic momentum, while emerging markets (MSCI EM) fell 1.1%. Value (MSCI World Value +2%.) marginally outperformed growth (MSCI World Growth +1.6%), while global bonds (Barclays Global Aggregate) managed a 0.4% gain over the month.
In the U.S., all three major indices ended the month higher – the growth heavy S&P 500 gained +1.5%, while the more value orientated Dow Jones, rose +2.5%, its best monthly performance since January. Minutes released from the Fed’s March meeting revealed that the central bank is now forecasting a “mild recession” later this year bought on in part by the tightening in lending conditions. In other economic news, the latest U.S. GDP report showed that the economy is losing momentum, with Q1 GDP slowing to 1.1% compared to 2.6% in the prior quarter, while the unemployment rate fell to 3.5%, against expectations that it would hold at 3.6%.
In the Eurozone, preliminary data showed that the economy grew by 0.1% on a quarterly basis in Q1 of 2023, missing the expected 0.2% growth estimate. In other news, inflation in the bloc eased considerably to 6.9% y/y in March from 8.5% y/y in February. Core inflation, however, increased slightly which has kept European Central Bank policymakers hawkish. In equities, stronger economic sentiment and a value tilt helped the Euro Stoxx 50 gain 1.03% over the month. For the ECB, the challenge now is to get inflation under control while, at the same time, avoiding a financial crisis stemming from the troubled banks in the United States.
In the UK, March’s headline inflation came in under estimates, rising 10.1% y/y from 10.4% in February. The UK has the highest inflation rate among G7 countries, creating doubt over whether the Bank of England (BOE) will pause rate hikes soon, as they have been suggesting. The blue-chip FTSE-100 Index rose 3.1% in April.
On the emerging market front, China's Q1 2023 GDP growth exceeded expectations, rising 4.5% q/q compared to the estimated 4% q/q. Retail sales surpassed expectations with a 10.6% y/y surge, but industrial production fell short of consensus with a 3.9% y/y gain in March. However, the overall GDP growth surge is a positive sign that the country is returning to normal and is on track to achieve its growth target of 5% for the year. China’s Shanghai index climbed 1.5% over the month.
South Africa’s (SA’s) FTSE JSE All Share Index recorded a 2.8% MoM gain (+7.1% YTD), while the FTSE JSE Capped SWIX rose by 3.4% MoM (+6.0% YTD). Gold counters and platinum group metal (PGM) stocks outperformed in April, buoyed by higher commodity prices, while SA-focused shares were patchy as ongoing load-shedding continued to weigh heavily on sentiment.
Inflation increased faster than expected in March, with headline inflation rising 7.1% y/y. Higher than expected food prices pushed the index higher, with food and non-alcoholic beverages rising by 14% y/y, contributing 2.4% to the total. In other news, amidst an increase in rolling power cuts, the IMF cut its SA 2023 growth forecast to a slight growth of 0.1%.
Against the U.S. dollar, the rand weakened by 2.7% m/m, while year-to-date, the local currency is now down 6.9%. Over the past week, the rand has massively underperformed, breaching the psychological R19.00/US$1 level on Thursday (11 May).