Markets brace for a tough start to 2023

The Johannesburg Stock Exchange in Sandton. Johannesburg. Picture: Timothy Bernard (ANA)

The Johannesburg Stock Exchange in Sandton. Johannesburg. Picture: Timothy Bernard (ANA)

Published Dec 13, 2022


Financial market traders are likely to wake up in 2023 with all the financial headaches that couldn’t be shaken off this year, and it’s quite a hangover… So expect traders to hold their positions for the best part of the first half, market commentators said yesterday.

This year’s challenges included worries about inflation, interest rate hikes, war in Ukraine, China’s shutdown to fight Covid, supply chain logjams, questions around equity valuations, and in South Africa: crime, load shedding, potholes, dry taps, and the governing party in chaos, Novare Investments’ head of investments, Jacobus Brink, said yesterday.

A last-gasp rally in international stock and fixed-income markets that started in October failed to stem losses suffered for most of the year globally, although the JSE was in positive terrain again relative to 2021. South Africa’s markets take their main themes from global markets.

“Expect traders to hold their position in the first half of 2023 as financial markets continue to digest the full ramifications of inflation and corporate earnings,” CM Trading’s strategist, Fred Razak, said yesterday.

“Just last week Facebook laid off 13 000 workers, and Twitter 4 000. There are a number of companies are looking at the situation and saying, 'let’s preserve our capital and see how far the down turn is’. What is the impact of that? We don’t know yet, so expect the markets to remain circumspect,” said Razak.

Brink said the outlook for the global economy was getting gloomier by the day, dimming earning prospects for companies and for consumers already struggling to cope with the rising costs of everything from food to fuel.

The International Monetary Fund, after saying in October that 2023 would feel like a recession, a month later warned that economic indicators were weakening further. “That’s starting to show in analyst earnings estimates,” said Brink.

For the first time since at least 1999, the average forecast of Wall Street strategists predicted a decline in the S&P 500 Index next year, according to a survey of 17 firms by Bloomberg. The analysts were divided on the extent, with calls ranging from a 10% gain to a 17% decline – the widest dispersion since 2009.

“I think we are going to continue seeing a slow down in growth, particularly if interest rates remain this high. People are going to shy away from some areas like new housing. Interest rates affect people’s ability to enter these markets and as a result these industries are going to be heavily impacted,” said Razak.

Old Mutual Wealth Investment strategist Izak Odendaal said last week 2023 was likely to be challenging, even though global markets had probably so far absorbed and discounted higher interest rates.

“The uncertainty is around the economic impact of these higher rates, because this impact takes time to materialise. The fact that economies have performed better than expected heading into the final month of the year should be of little comfort. The stronger consumer spending is now, the less likely inflation is to decline meaningfully by itself, and the more likely central banks will have to maintain the pressure,” he said.

Odendaal said global equities had jumped 15% from the early October low, when the MSCI All-Country World Index was down 25% from its peak at the start of the year in dollars. South African equities had also gained 15% from its worst point this year, also in mid-October.

Brink said it seemed as if “there’s an accident waiting to happen” considering that stocks on the S&P were trading within 20% of their all-time highs, valuations were at multiples of where they were a few years ago when the market was in a bull run, inflation was still uncertain, no one knew when the Fed was going to pause interest rate hiking, economies were slowing, and consumers were struggling.

On energy prices Razak said the full extent of Russian President Vladimir Putin’s plans following Russia’s invasion of Ukraine might still not be well known. “I think we will get telling signs as to what his agenda truly is within the next six months to a year,” he said.

Odendaal said commodity markets currently seemed to be ignoring the war.

“At $85 (R1 486) per barrel, the price of Brent crude is lower than before the invasion. This despite OPEC+ production cuts and a recently imposed European embargo on Russian imports. Although sunflower oil and wheat prices are also back below pre-invasion levels, gas and coal prices are not.”

However, gas prices were well off their mid-year peak, and so was the coal price that moved in sympathy as the closest alternative.

“As a result, the extremely bleak European winter that was widely expected might not be quite so bad, though the combination of high energy prices, core inflation at 5% and rising rates are certainly not pleasant,” said Odendaal.

The world’s most influential central banks are caught in aggressive hiking cycles, the effects of which are rippling across the globe, including in South Africa, where the Reserve Bank has followed the size of the US rates increases.

“There’s no telling when inflation, which earlier this year hit 40-year highs in the US and UK and soared in double-digits in the euro area, will peak. Morgan Stanley expects global inflation to reach its pinnacle in the fourth quarter of next year,” said Odendaal.