Momentum Investments have released their report based on ‘Market and economic outlook: January 2023’ prepared by the Momentum Macro Research Team.
Sanisha Packirisamy, Economist at Momentum Investments.
Below is a summary of the highlights with a download link to the full report at the bottom.
While global equity markets could be under pressure during the larger part of 2023 as they deal with the potential for recessions and the final phases of rate tightening, there could be some relief for equities towards the latter part of the year as markets start looking beyond the downward growth cycle and begin discounting an eventual Fed pivot to lower interest rates.
Fundamentally, the anticipated combination of falling inflation and slowing economic growth (with a meaningful risk of recession) should be supportive of the United States (US) bond market in 2023. This could re-establish the hedging benefits of having government bonds in a global diversified portfolio, particularly during potential equity drawdown periods amid a cyclical slowdown or recession. The significant runup in bond yields in 2022 has once again made fixed income a viable income-providing alternative to equities and made US government bonds look cheap versus US equities.
Although global property fundamentals remain solid and the asset class looks cheap against equities, its expensiveness against fixed-income assets erodes its relative attractiveness.
South African (SA) equities have an attractive valuation underpin, both within the global universe and against its history. This should stand it in good stead during potential global equity drawdowns, but particularly during subsequent recoveries when global risk appetite rises. Even more so, as SA is the fifth most underowned market within global emerging market (GEM) equity funds.
SA real bond yields are attractive against their history, as well as relative to those in global markets, with part of the high real yield differential due to a fiscal and country risk premium. We expect falling inflation in the coming year to become less supportive of inflation-linked bonds (ILBs). The prospective SA real cash yield has been rising from a low level in line with policy rate increases and is now only slightly below its historical average.
Although SA listed property operational metrics are improving, they remain worse than in the pre-COVID era. The potential for meaningful listed property return upside from undervalued levels needs to be weighed against some remaining negative fundamental factors.
The globe is facing higher levels of geo-economic fragmentation, reduced liquidity, a lower growth pattern in China, increased global conflict and higher inequality.
Although an over-tightening in monetary policy raises the risk of negative growth outcomes sooner, the risk of under-tightening is seen to pose a bigger threat. Unhinged inflation expectations could force central banks to tighten policy even more, over a longer period, resulting in a more damaging hit to growth and jobs.
A further easing in supply-chain disruptions, favourable base effects in food and fuel and demand destruction are expected to drive inflation lower in 2023. A return to central bank targets could nonetheless take time given stickier services and wage inflation.
In our view, central banks need to have clear sight of a sustained deceleration in underlying inflation and a reversal in tight labour market conditions for interest rate cuts to be considered. Market-implied policy rates point to a peak in the US federal (Fed) funds rate in the first half of next year. Market participants are pricing in a cut before the end of 2023, after an expected pause.
A faster relaxation in COVID-19 regulations in China, a warmer winter in Europe that prevents energy rationing or stronger real wage growth for the US consumer can lift our base case view on global growth.
Stickier inflation leading to additional interest rate tightening (relative to the baseline), a colder European winter that enforces more energy rationing, a bumpier path to unwinding China’s zero-COVID strategy, renewed Chinese property sector woes or an accelerated decoupling between the US and China could leave global growth at a mere 0.5% in 2023.
Lower growth in SA’s main trading partners will reduce demand for SA’s exports, while slow reform in energy and logistics as well as mounting consumer headwinds will cap growth in domestic demand. Question marks over SA’s political outlook cast a dark shadow over investment and growth prospects.
The SA Reserve Bank (SARB) is likely to hike further in the first quarter of 2023 to arrest the spread of broad-based inflation pressures.
A potential greylisting and a consequent exiting of a greylisted status will depend on perceived action to address the Financial Action Task Force’s (FATF) concerns.
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