The table below provides a review of key domestic and international investment indicators for the past quarter, as well as over longer periods.
South African asset classes (in rands)
(Performance over periods to 31 December 2022)
Global asset classes (in dollars)
(Performance over periods to 31 December 2022)
(Performance over periods to 30 December 2022)
* Updated annually from 1900, or longest available period
Returns for periods longer than 12 months are annualised
INTERNATIONAL MARKET COMMENTARY
2022 was an eventful and extremely challenging year. The main underlying culprit for the disappointing equity and bonds market returns last year was high and rising inflation. This led to central banks around the world to raise interest rates sharply and in doing so, putting downward pressure on almost all asset classes.
Except for a weak December, the final quarter of the year proved to be very good for markets. Sentiment was supported mainly by a decline in expectations for interest rate increases, with speculation that central banks (specifically the US Fed) would start to ‘pivot’, become less hawkish and start to slow the pace of rate increases as inflation showed signs of peaking. The restoration of some stability in the UK government, with Rishi Sunak replacing Liz Truss as Prime Minister, and a greater emphasis placed on fiscal prudence also assisted in stabilising markets, especially UK government bond markets. Warm weather in Europe helped to reduce natural gas demand, alleviating some pressure on governments looking to stockpile ahead of winter. Another positive for the markets stemmed from China, where official announcements seemed to suggest that they were moving away from their zero Covid strategy, despite paradoxically seeing a recent surge in cases numbers.
The impact of higher inflation, geopolitics and a steep global interest rate hiking cycle led to the uncommon breakdown in negative correlation between equities and bonds and saw both asset classes deliver meaningful negative returns for the year. Equities fell sharply with global equity markets down -18,0% (in US dollar terms) over the year, although it could have been much worse if not for a strong final quarter. Market weakness was broad-based in 2022, with US and emerging markets down the most. Outside of the US dollar, energy sector and specific commodities, there were few places to hide. Although developed market equities banked just shy of double digit returns in the last quarter, as mirrored by the MSCI All Country World Index which was up 9,9% (in US dollar terms). Interest rate sensitive growth stocks, in particular technology counters, declined meaningfully from their lofty valuations at the start of the year, especially relative to value stocks. Local Chinese markets also rallied once more in December as Covid restrictions were lifted, with the Hang Seng 15,7% over the fourth quarter. This provided some support to emerging markets, which have been under duress from weak economic growth in China, higher interest rates and a very strong US dollar. The MSCI Emerging Markets Index advanced 9,8% over the quarter but lost 19,7% over the last 12 months (in US dollar terms).
Smaller interest rate hikes from major central banks helped global bond markets deliver another positive month in December. In US dollar terms, the Barclays Global Aggregate Bond Index advanced by 0,5% over the month, bringing returns over the quarter to 4,5% and improving the yearly decline. Nonetheless, 2022 was a tough year for sovereign bond investors with a drawdown for the same index of -16,2%.
DOMESTIC MARKET COMMENTARY
The final quarter of the year saw South Africa’s economy continue to suffer under the state of its network industries, with the impact of persistent loadshedding featuring strongly in weaker PMI activity surveys for September. However, the Medium-Term Budget Policy Statement (MTBPS) confirmed a gross tax revenue overrun of R83.5bn relative to Budget 2022 estimates. Alongside higher nominal GDP, this delivered much improved fiscal metrics with gross debt to GDP stabilising faster and at a lower figure of 71,4%.
Headline inflation for the year to October 2022 delivered an upside surprise of 7,6% relative to market expectations for a lower figure, and above the 7,5% recorded in September 2022. Producer inflation however continued to trend lower. The South African Reserve Bank (SARB) increased interest rates by 75 bps, the third consecutive hike of this magnitude. Three members voted in favour of a 75-bps hike and two were in favour of a 50bps hike, signalling that a smaller hike may be considered at the next meeting.
November saw a weaker US dollar and rally in global bond markets help the FTSE/JSE All Bond Index gain 3,9% with the rand benefitting even more, appreciating by approximately 6,1% against the US dollar. Local equity markets recovered in line with global trends, with the FTSE/JSE All Share advancing 12,3%. A recovery in bellwethers Naspers (39%) and Prosus (39%) contributed, spurred by an update on the buyback programme, constructive financial results from Tencent and an announced distribution of Tencent’s Meituan stake. Resources rallied 17% with notable gains from industrial and precious metals, while the property sector continued to gain traction, 6,3% in November.
In December, after some delays, Eskom released financial results, posting an annual loss of R12,3bn, albeit an improved figure from the prior year and a decrease in gross debt. The challenges of non-compliant municipalities, diesel and maintenance costs as well as sabotage were outlined by outgoing Eskom CEO, Andre de Ruyter, who resigned from his post earlier in the month. He will stay on in the role until March 2023 to enable continuity and allow the board to find a replacement. This comes at a time when COO Jan Oberholzer, who has been with the entity for more than thirty years, is due to retire in April 2023.
Despite a negative print in December, local equity markets delivered positive returns over the quarter with the FTSE/JSE All Share gaining 16,0%. This brings the one- year return to 3,6% in local currency and -2,8% in USD terms due to currency depreciation of 6,3% over the same period. Nonetheless, outperforming developed market and many emerging market counterparts.
Domestically exposed small cap counters delivered a credible 7,6% in 2022, outperforming large and mid-cap counterparts. Resources rallied 17,6% over the quarter and 7,6% over the year with notable gains from industrial metals and energy related sectors, while financials (10,2%) and banks (17,7%) delivered a strong 12- month performance. The property sector rallied alongside other risk assets in the fourth quarter (19,3%), but only managed a paltry 0,5% over the last year. Despite a strong final quarter for index bellwethers Naspers (25,1%) and Prosus (24,2%), their fortunes have diverged over the year with Naspers gaining 14,6% versus a decline of 9,9% for Prosus.
DISCLAIMER
Nedgroup Collective Investments (RF) Proprietary Limited is an authorised Collective Investment Scheme and the representative of Nedgroup Investments Funds PLC in terms of the Collective Investment Schemes Control Act. It is a member of the Association of Savings & Investment South Africa (ASISA). Collective Investment Schemes are generally medium to long-term investments. The value of your investment may go down as well as up. Past performance is not necessarily a guide to future performance. Nedgroup Investments does not guarantee the performance of your investment and even if forecasts about the expected future performance are included you will carry the investment and market risk, which includes the possibility of losing capital. Our funds are traded at ruling prices and can engage in borrowing and scrip lending. Certain funds may be subject to currency fluctuations due to its international exposure. Nedgroup Investments has the right to close funds to new investors in order to manage it more efficiently. A fund of funds may only invest in other funds, and a feeder fund may only invest in another single fund, both will have funds that levy their own charges, which could result in a higher fee structure. A schedule of fees, charges and maximum commissions is available on request from Nedgroup Investments.
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