Investors behaving badly: a cheat sheet to narrowing the behaviour gap
Emotions define us as humans, but it also costs investors over 1% per year according to Morningstar. Advisers who pro-actively engage in behavioural coaching with their clients will tangibly add value to the investors experience. Perhaps you may also find that whilst markets are cyclical, your business doesn’t necessarily need to be.
An advised client stands to benefit the most
Our emotions are a differentiating factor from robots, artificial intelligence, and behaving like the “rational investor”. The price paid for this individuality, observed within our investments, however, is the behaviour gap; the difference in return between what the factsheet shows, and what our investment actions delivered.
Traditional investment theory unfortunately doesn’t accommodate all too much of this true human behaviour into our many models, instead it assumes the idea that investors behave rationally. However, in the heat of “battle” humans are driven by emotions and cognitive biases. In fact, Vanguard estimates the value an adviser can add to their client’s journey is nearly 2% p.a. (through behavioural coaching).
Key target areas for behavioural coaching, evidence from across the globe
Morningstar has recently written two reports analysing the behaviour gap. They used their vast database of fund returns, and fund flows, to determine when and where investor behaviour adds value to their net result. Their conclusions are not all too surprising:
Investors consistently behave badly: across their 10-year study, investor behaviour consistently detracted from a buy-and-hold strategy. This was greatest during big market drawdowns such as 2020 and 2022.
Performance is more tangible than risk-management: The top performing funds (time-weighted returns) attracted the most flows, but also presented the greatest behaviour gap as performance often turned after attracting the industry’s attention. This performance chasing, or misallocation of capital, by investors is based on exciting thematics rather than a sound investment process.
Diversified portfolios narrow the behaviour gap: Multi-Asset class funds demonstrated the smallest behaviour gap of all categories analysed. The widest gap was observed in the most volatile and narrow-focused strategies such as sector-specific equity, value style, and other storied investment themes.
Investor trust is fragile: Active strategies present a larger behaviour gap than passive strategies do. This is a nuanced topic but interestingly when controlled for fees the report does not observe a discernible behaviour gap, perhaps speaking more to the fragility of investor trust.
The behaviour gap in action
Some of the most interesting examples of the behaviour gap include the iShares Clean Energy ETF which after an exceptional 140% return in 2020 saw its assets double to over $6bn by January the next year. In the five-year period under review the annualised factsheet return was 17% per annum, however the average investor in the ETF would have observed -3% per annum. A behaviour gap of 20%!
Similarly, other narrow-mandated strategies such as the JP Morgan Pacific Technology fund and the iShares Barclays Cap USD Asia High Yield Bond ETF exposed investor misbehaviour to the extent of 17% and 12% respectively.
Morgan Housel spoke directly to why these investments appeal to investors when he wrote, “We crave certainty and are attracted to complexity. Good stories persuade us far more than facts”. We cover this topic from an adviser’s perspective in this article. As Vanguard stated in their whitepaper in which they attempt to quantify adviser’s alpha, “The markets are uncertain and cyclical – but your practice doesn’t have to be”.
The journey matters, and we know it
These concepts are in our DNA at PortfolioMetrix. When building client portfolios, we look to engender investor trust through portfolio construction. Pairing behavioural coaching and broader financial advice with this investment approach is going to drive a far smoother experience for the investor as they navigate the various stages of their investment journey.[/vc_column_text][us_separator][vc_column_text]
South African inflation has benefitted from a stronger currency and lower oil prices. The latest print (October inflation annualised) came in at 2.8% which is below the 3-6% target band. Demand in the domestic economy is also quite low, and a restrictive policy rate set by the Reserve Bank is unlikely to change that. There will be growing calls for the SARB to cut rates more aggressively should inflation remain subdued.
Since Donald Trump won the US election markets have been more concerned around global trade, and particularly the impact of tariffs. This has caused the US Dollar to strengthen and EM currencies to weaken amid greater uncertainty. Specific to South Africa, ABSA research suggests that the removal of our participation in the Africa Growth and Opportunities Act (AGOA) will have limited economic impact overall.
S&P Global revised its outlook for SA government debt to “positive” from “stable”. This is a good step in the direction of reestablishing investment grade status, although there is still material progress required before the different rating agencies will upgrade our rating.
Protectionist policies have taken the forefront since Donald Trump was re elected. Part of his “America First” agenda. The uncertainty this brings has led to a stronger US Dollar driven by risk-off rather than a confidence of a stronger US economy. The feedthrough of these policies to inflation is also unknown, however, economic friction typically translates in a rise in inflation.
Geopolitical concerns have risen over the last month, following Donald Trumps election victory. Some of these are due to uncertainties around future policy, in particular with respect to China, but Joe Biden has also had his role to play. The US allowed Ukraine to use American long-range missiles to strike deep inside Russia. The potential implications of this decision are not known. Tensions in the Middle East and Syria remain present too.
Central banks across the globe recently entered a cutting cycle. Markets priced the cutting cycle to be quite deep, yet inflation appears to be more stubborn than most anticipated. Namely the US, Canada, UK, Brazil, and the EU, have experienced this, leaving future interest rate paths uncertain.
[vc_row][vc_column width=”1/1″][us_post_date format=”jS F Y” css=”%7B%22default%22%3A%7B%22font-size%22%3A%2211px%22%7D%7D”][us_post_title tag=”h4″ css=”%7B%22default%22%3A%7B%22color%22%3A%22_header_middle_bg%22%2C%22text-transform%22%3A%22uppercase%22%2C%22background-color%22%3A%22%23c25adb%22%2C%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D”][us_post_image thumbnail_size=”full”][/vc_column][/vc_row][vc_row height=”auto”][vc_column width=”4/5″][us_separator size=”small”][vc_column_text]In July, markets delivered mixed results across different asset classes. Global bonds performed well as yields fell, driven by softer-than-expected economic data from the US, including a decline in the Consumer Price Index (CPI), which measures inflation. These lower-than-expected inflation figures led investors to anticipate that the US Federal Reserve might cut interest rates sooner than expected. Equities showed regional variation in performance: UK stocks surged, bolstered by the positive market response to the Labour party’s general election victory, while US stocks dipped slightly due to disappointing earnings from large tech companies. However, smaller US companies fared better, buoyed by the expectation of rate cuts. Meanwhile, real assets, such as property and infrastructure, demonstrated strong returns as they are viewed as more stable investments that benefit from lower interest rates, which reduce borrowing costs and increase asset values.
The local stock market locked in another strong month of gains as upward momentum, following the outcome of the recent election, continued to support flows from local and offshore participants. SA bonds followed the same trend, continuing a strong rally as foreigners bought R19.7bn worth of SA debt instruments in July. The Monetary Policy Committee (MPC) decided to hold the repo rate unchanged at 8.25% at its July meeting. The decision was not unanimous, however, and two of the six members voted for a cut of 25bps, indicating that the start of a rate cutting cycle may be sooner than previously expected. Market expectations are for a 25bp cut in September as inflation slowly ticks towards the central bank’s midpoint target.[/vc_column_text][us_separator][vc_column_text]
The SARB left rates unchanged in the month and remained relatively cautious in their communication, stating that any future decisions would be data – dependent. Perhaps it was the acknowledgement that two members of the MPC had opted for a rate cut that tilted the scales because there was a steady slide in the ZAR that began shortly after the MPC announcement. However, most central banks are talking about easing monetary policy, and some EM’s in LATAM have already started cutting.
The SARB’s leading business cycle indicator fell to 111.9 points in May from 113.0 points in April. On a year-to-year basis, the leading indicator increased by +2.0 % y/y in May compared to +1.8% y/y in April. The largest positive contributor was the increase in South Africa’s ‘US dollar-denominated export commodity price index’ as well as the improvement in the ‘RMB/BER Business Confidence Index’. The SARB’s leading indicator is valuable for estimating shifts in South Africa’s economic cycles. The high level of election uncertainty likely contributed to the drop in the leading indicator in May, suggesting we should see an improvement in the index going forward following the formation of the GNU.
The IMF reaffirmed their growth forecast for SA of 0.9% for 2024, and 1.2% for 2025. The assumptions they have used for these forecasts have not changed and will only be tweaked once the IMF sees whether the GNU can implement the reforms it has targeted. It will, of course, take time for the new government to be able to pick the low-hanging fruit and extract more dynamism from the economy. These things are not achieved through one decision or a flick of a switch. Policies are implemented, and the effects manifest over time.
US President Joe Biden took the unprecedented step of withdrawing from the presidential race, marking the first time in over 50 years that
a sitting president has not sought re-election. Biden’s decision to exit the 2024 race and endorse Vice President Kamala Harris just 106 days
before the vote has been met with relief by Democratic insiders and a new sense of optimism around Harris’s chances of beating Donald
Trump.
Keir Starmer’s Labour Party won a large majority in the UK parliamentary election, ending 14 years of Conservative rule. Labour’s victory reflects widespread public discontent with the Conservatives over issues like the cost of living crisis and failing public services. Notably, turnout for the election dropped to a 100-year low, pointing to a rejection of the traditional duopoly in British politics. The market doesn’t seem too worried about a political change, with Labour’s spending plans fiscally-neutral.
The big central bank story this month was the decision by the BoJ to raise interest rates to 0.25%, and projected inflation would remain around the 2.0% target. It furthermore indicated that it would seek to steadily unwind its massive monetary stimulus. The move leaves plenty of scope for yen volatility ahead, which will affect higher-risk currencies that have benefitted from carry trades.
[vc_row][vc_column width=”1/1″][us_post_date format=”jS F Y” css=”%7B%22default%22%3A%7B%22font-size%22%3A%2211px%22%7D%7D”][us_post_title tag=”h4″ css=”%7B%22default%22%3A%7B%22color%22%3A%22_header_middle_bg%22%2C%22text-transform%22%3A%22uppercase%22%2C%22background-color%22%3A%22%23c25adb%22%2C%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D”][us_post_image thumbnail_size=”full”][/vc_column][/vc_row][vc_row height=”auto”][vc_column width=”4/5″][us_separator size=”small”][vc_column_text]June saw mixed results across markets, with varying returns in both bond markets and equity regions. Generally, bond yields fell slightly, supporting fixed income prices, as inflation moderated across most regions, most notably in the UK where inflation dropped to the Bank of England’s target of 2.0% for the first time since 2021. The European Central Bank (ECB) cut interest rates as expected, however the timing of the first rate cut from the Bank of England and US Federal Reserve remain uncertain – although markets still expect them to occur this year. UK and European equities fell, as a surprise snap general election was called in France – causing some uncertainty in European markets. US equities performed strongly as did emerging market equities following the results of the Indian general election and Chinese data that again surprised to the upside.
It was an exceptionally favorable month for South African asset classes, marked by the strengthening of the rand, a rally in bond yields, and strong performance in local equities, particularly in financials and property stocks. This was driven by optimism from election results whereby the ANC lost its majority, and a government of national unity was formed. The local market was one of the top performing emerging markets over the month meaningfully outperforming the broader EM indices which in turn outperformed developed markets. Due to a stronger rand, global asset classes underperformed despite reasonable returns in hard currency.[/vc_column_text][us_separator][vc_column_text]
They say a week in politics is a lifetime and this certainly played out over the month. Elections on 29 May were followed by major changes in the South African political landscape with the ANC losing its majority and the likes of the MK party taking their place as a serious political player in the country. The usual political antics played out over the month with speculation of potential coalition partners for the ANC. However, a government of national unity was formed and the resultant cabinet announcement at the end of the month was seen as positive by the market. This is the first step in a new positive direction, however, the road to be travelled will undoubtedly be a bumpy one.
SA posted its first primary budget surplus (revenue exceeding non-interest expenditure) in over 15 years of R31bn or 0.4% of GDP. This was mainly a result of government holding firm on not continuing to fund debt-laden state companies unless they meet certain strict criteria. Although only one data point, it is a step in the right direction as the country tries to stabilise its debt metrics (debt-to-GDP is currently at 74% [EM average: 59%])
Electricity generation continues to pick up after the lows of last year with both Eskom and the private sector adding to generation. Although demand is still weak, this is net positive for the economy and inflation. SA has not had loadshedding since 26 March 2024. Prior to elections, this was seen as an election ploy with rumours of excessive diesel burning and loadshedding to return soon after. However, this has not been the case and data shows diesel use actually subsiding.
June saw the first presidential debate in the US ahead of November’s election which was widely acknowledged not to have gone well for Biden. Betting markets swiftly adjusted to the possibility of Biden stepping down from the race and being replaced, likely by Kamala Harris. The stakes are high for the US, and Democrats are concerned that the current president may not be fit to compete for re-election, let alone serve a second term.
The European Central Bank (ECB) cut interest rates by 0.25% after having held rates steady for nine months. It believes now is an appropriate time to moderate the degree of monetary policy restriction given cooling inflation and the underlying dynamics of prices. The move signals the likely divergence in interest rate policy in the developed world given the structural differences in growth across economies.
French President Emmanuel Macron called a snap election after his party suffered losses to Marine Le Pen’s National Rally party in the EU elections. This backfired as markets sold off over worries that the National Rally, who have a number of market-unfriendly policies, will actually win these elections.
[vc_row][vc_column width=”1/1″][us_post_date format=”jS F Y” css=”%7B%22default%22%3A%7B%22font-size%22%3A%2211px%22%7D%7D”][us_post_title tag=”h4″ css=”%7B%22default%22%3A%7B%22color%22%3A%22_header_middle_bg%22%2C%22text-transform%22%3A%22uppercase%22%2C%22background-color%22%3A%22%23c25adb%22%2C%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D”][us_post_image thumbnail_size=”full”][/vc_column][/vc_row][vc_row height=”auto”][vc_column width=”4/5″][us_separator size=”small”][vc_column_text]Inflation in the US continues on its downward trend, just at a slower pace than originally anticipated by the markets. This has led the US Fed to maintain rates at a higher level. Other central bankers however face slightly different challenges and as such have begun cutting rates in their economies. Despite the higher US rates and increased geopolitical risks markets continue to reward the A.I.-themed rally benefitting the mega-cap US tech stocks such as NVIDIA and Microsoft. Global equities led returns in this environment.
Elsewhere, Chinese optimism has lifted ever so slightly in the midst of a confidence crisis and the UK heats up as they enter the runup to their elections in July. The Labour party lead the Conservative party in the polls.
South African (SA) asset classes had a very muted response during May, choosing a holding pattern after a very strong leadup into the election month. Uncertainty prevailed as the ANC has evidently lost its 30-year majority rule. What is important to recognize is that the elections appear to have been free and fair, and whilst turnout of all eligible voters has been quite low we have observed a peaceful democratic process. All eyes now turn to the coalition phase of our democracy, a very important tone will be set by which parties form coalitions at both national and provincial levels. Given the cheaper valuations of South African asset classes we remain optimistic of good forward returns should some uncertainty settle.[/vc_column_text][us_separator][vc_column_text]
South Africa peacefully exercised their democratic right to vote at the end of May, initial results indicate a weak performance from the historically dominant ANC. The ANC will likely need to form coalitions in order to form a bloc of more than 50% in the national legislature, concerns around the shape and form of this coalition have resulted in increased market volatility. Parliament will sit and elect a new president in the middle of June, likely confirming any coalitions just prior to that.
In what seemed to be a last ditch electioneering ploy from the ANC, Cyril Ramaphosa signed the NHI Bill into law two weeks before elections. This has started a long term battle between government, medical aid schemes, civil society and various other bodies. It seems the form and manner in which NHI may eventually come to being will likely be very different to what is currently proposed. Funding for one has not been considered by Treasury at all and the practicalities of this remains a mystery to most.
Inflation in South Africa cooled to 5.2% y.o.y. in April from 5.3% the month before. Although slowing down, it remains above the mid-point of the SARB’s inflation target. Given this, the reserve bank kept interest rates on hold at 8.25%.
The Fed has kept the Federal Funds Target Interest Rate unchanged at 5.25%-5.50%. The “higher for longer” mantra remains in the US, and
markets now price in less than 100% probablity of even a single rate cut in the remainder of 2024. US Interest rates, however, remain
important as the global risk-free rate despite other central bankers cutting rates in their own economies. This possibly provides further
impetus for a strong US Dollar as US rates remain attractive relative to the rest of the world.
Data showed that inflation remained even more sticky in the US. Headline inflation rose to 3.4% in April, marginally down from 3.5% the prior
month. Core inflation eased to 3.6% in April, in-line with expectations. Most disappointingly, the Federal Reserve’s preferred inflation
measure (Core PCE – which has a lower weight to housing costs) has printed at 2.8% for the past three months, higher than the expected
2.6% and above the 2% US Fed target.
Emerging markets, broadly speaking, have benefitted from an increase in global risk sentiment, however, a broader improvement in Chinese
confidence could be a big tailwind for EM should it reverse. Whilst difficult to immediately see where this rise in confidence will come from in a year of US elections it is worth taking note of policy steps taken by the Chinese Government to address the real estate and economic challenges in that economy.
[vc_row][vc_column width=”1/1″][us_post_date format=”jS F Y” css=”%7B%22default%22%3A%7B%22font-size%22%3A%2211px%22%7D%7D”][us_post_title tag=”h4″ css=”%7B%22default%22%3A%7B%22color%22%3A%22_header_middle_bg%22%2C%22text-transform%22%3A%22uppercase%22%2C%22background-color%22%3A%22%23c25adb%22%2C%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D”][us_post_image thumbnail_size=”full”][/vc_column][/vc_row][vc_row height=”auto”][vc_column width=”4/5″][us_separator size=”small”][vc_column_text]Stickier-than-expected inflation and geopolitical tension were the overarching themes for April. The US, UK, and Euro area all saw more stubborn than expected inflation. This was alongside some marginally more positive than expected economic data across major markets, which caused markets to re-evaluate the timing and pace of interest rate cuts by central banks, particularly the US. In the background, further escalation of tensions in the Middle East brought about further uncertainty, market volatility, and higher oil prices. This all led to bond yields rising and thus prices falling. The majority of equity markets fell in sympathy as rate-cut optimism faded. The notable exceptions were UK equities, which benefitted from exposure to large oil companies and dollar earnings, and Emerging Markets, driven by commodity exporters.
South African (SA) equity meaningfully outperformed global equity and was the best-performing asset class for SA investors, driven by a substantial bounce in the resources sector. Global asset classes, in general, experienced a currency headwind as the rand found some support and strengthened over the month. Local bonds followed the path of the rand and had a strong month after a lackluster start to the year. Local property softened slightly whilst global property underperformed all other asset classes.[/vc_column_text][us_separator][vc_column_text]
Headline consumer prices in South Africa slowed for the first time in two months to 5.3% year on year in March, below market expectations of 5.4%. Core inflation was also slightly lower, offering some breathing room to the SARB and investors following stickier data earlier in the year. Kganyago, however, reiterated that a sustained downward inflation trend towards the midpoint target is needed before rate cuts can take place.
April was the first month since 2022 to be free of loadshedding. Eskom has seen improved performance from their plants, as they achieved an energy availability factor (EAF) of 65%, last seen in 2021. The benefits to the economy are already evident as the manufacturing sector showed signs of a strong recovery in April, with the Purchasing Managers’ Index (PMI) rebounding to 54.0, up from 49.2 a month ago, indicating an expansion.
A new opinion poll from Ipsos showed that support for the ANC has slipped to the 40% level, while the leftist EFF are leaking votes to MK, a new party backed by former President Jacob Zuma. Support for the main opposition Democratic Alliance, which espouses pro-business economic policies, strengthened slightly to 21.9%, from 20.5% in February. The bond market rallied and the rand gained as much as 1.6% after the poll was published, as investors bet it signals a market friendly coalition will emerge from next month’s election.
The Fed has kept the Federal Funds Target Interest Rate unchanged at 5.25%-5.50% for the sixth consecutive time. Powell’s commentary, however, was less hawkish than expected, especially given the upside surprises to the recent inflation data. While Powell acknowledged the disappointing inflation data, he indicated that “it is unlikely that our next move will be a hike”. This provided some relief to investors who were beginning to worry that a rate hike was becoming a likely option.
Data showed that inflation remained even more sticky in the US. Headline inflation rose to 3.5% in March, up from 3.2% the prior month and above the 3.4% expected. Core inflation remained at 3.8% in March, but was expected to dip a little. Most disappointingly, the Federal Reserve’s preferred inflation measure (Core PCE – which has a lower weight to housing costs) remained at 2.8%, but had been expected to fall to 2.6%.
The US labour market showed signs of slowing as job openings fell from 8.8 million in February 2024 to 8.5 million in March 2024. This was below market expectations for a decline to 8.6 million. The US economy added 175 000 jobs in April, below the consensus estimate of 240 000 jobs and the smallest gain in six months. The unemployment rate increased slightly to 3.9% from 3.8% in March, while wage growth eased to below 4% y/y for the first time since mid-2021.
[vc_row][vc_column width=”1/1″][us_post_date format=”jS F Y” css=”%7B%22default%22%3A%7B%22font-size%22%3A%2211px%22%7D%7D”][us_post_title tag=”h4″ css=”%7B%22default%22%3A%7B%22color%22%3A%22_header_middle_bg%22%2C%22text-transform%22%3A%22uppercase%22%2C%22background-color%22%3A%22%23c25adb%22%2C%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D”][us_post_image thumbnail_size=”full”][/vc_column][/vc_row][vc_row height=”auto”][vc_column width=”4/5″][us_separator size=”small”][vc_column_text]March saw the end of the last standing negative interest rate, with Japan’s central bank raising its policy rate into positive territory. Globally, equity markets continued trending upwards in the face of broadly neutral economic news, as market participants continued to discount the chance of a recession, which also contributed to solid, if unspectacular, fixed income returns. Global inflation continued to fall or hold at current levels, largely in-line with expectations; and business sentiment generally rose. Risks do, however, remain and central banks have been wary of cutting interest rates too soon. The UK, US and Euro Area all maintained current interest rates during the month.
South African (SA) equity meaningfully outperformed global equity and was the best performing asset class for SA investors. Global asset classes, in general, experienced a currency headwind as the rand found some support and strengthened over the month. Local bonds had a tough month with yields rising right across the curve, particularly in the long end, negatively affecting bond prices. Local property softened whilst global property performed better despite a stronger rand.[/vc_column_text][us_separator][vc_column_text]
The vanilla indices of the JSE, including the All Share Index and the Top 40, were aligned to the shareholder weighted methodology resulting in a harmonisation of the two main indices (SWIX and ALSI). The different methodologies resulted in significantly different stock weights which contributed materially to large differences in performance between the two benchmarks. The main reason for the large difference was the treatment of ‘grandfathered’ stocks on the JSE that moved their primary listing offshore. Companies like Richemont (amongst others) had a significantly higher weight in the ALSI relative to the SWIX because of this. The harmonisation of these indices is a positive step in simplifying benchmarks and benchmark choice for local equity managers. This will also improve assessment of these managers going forward.
In a macro environment of uncertainty some positive policy moves in South Africa are taking hold. Amongst these was the reappointment of Lesetja Kganyago as SARB governor for another five-year term, reinforcing the independence and continuity of the Reserve Bank.
For a second month in a row inflation in South Africa rose marginally in February with headline inflation moving closer to the upper band of the inflation target with a reading of 5.6% year on year from 5.3% in January. This was considered a surprise by analysts resulting in expectations of interest rates remaining higher for longer in South Africa. After the inflation release the SARB MPC decided to hold the repo rate steady at 8.25%.
Slightly disappointingly, both headline and core inflation were marginally worse than expected at 3.2% (a rise from 3.1% in January) and 3.8% respectively. But the Federal Reserve’s preferred inflation measure (Core PCE – which has a lower weight to housing costs) ticked down to 2.8%, in-line with expectations.
Most notable in Japan was the end of negative interest rates (which rose to 0-0.1%), abandoning yield curve controls, and heavy reductions in asset purchases (no longer buying ETFs and REITs). The increase in rates was the first in 17 years from Japan and somewhat out of sync with the direction of travel from other central banks. In other good news, Q4 GDP growth was revised upwards to 0.1%, from -0.1% meaning that Japan avoided a recession at the end of last year. Also pleasing was the fact that inflation picked-up again in February to 2.8% from 2.2% in January, although this was below expectations of 3%.
The global scene saw interesting central bank action as both Switzerland and Mexico cut rates by 25bps, hope in the UK for a cut increased, and the US held steady but continued to signal three cuts in 2024.
[vc_row][vc_column width=”1/1″][us_post_date format=”jS F Y” css=”%7B%22default%22%3A%7B%22font-size%22%3A%2211px%22%7D%7D”][us_post_title tag=”h4″ css=”%7B%22default%22%3A%7B%22color%22%3A%22_header_middle_bg%22%2C%22text-transform%22%3A%22uppercase%22%2C%22background-color%22%3A%22%23c25adb%22%2C%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D”][us_post_image thumbnail_size=”full”][/vc_column][/vc_row][vc_row height=”auto”][vc_column width=”4/5″][us_separator size=”small”][vc_column_text]A continuation of the strong US earnings season and stronger US economic data reignited market confidence from the end of last year. Business optimism appears to have returned to the US and, alongside signs of slightly stickier inflation, expectations for when the interest rate cutting cycle will begin were pushed out. The UK fell into a technical recession, but again there are signs that businesses are resilient, pointing to the likelihood of a very shallow and short recession. Broadly positive economic news fed through to stronger equity markets, whilst bonds fell slightly as the prospects of interest rate cuts were pushed out.[/vc_column_text][us_separator][vc_column_text]
The SARB will transfer R250bn to the Treasury of which R150bn will be used to reduce debt over the next three years. The Gold and Foreign Exchange Contingency Reserve Account (GFECRA) has grown substantially over the years (mainly due to a weakening currency and appreciation in the gold price) resulting in it becoming sizable as a percentage of GDP relative to global norms. The GFECRA withdrawal will be formalised through legislation, and through a framework agreed upon between the National Treasury and the SARB. This resulted in the outlook for debt-to-GDP of the country improving from the MTBPS. However, the move is a “once off” that cannot be repeated in the short to medium term. Fundamentally the country requires growth.
State owned logistics firm, Transnet, appointed Michelle Phillips as CEO after she had been acting CEO of freight rail, ports and pipelines utility since November. The move was seen as broadly positive by business, a rarity in South Africa, particularly given prior dubious appointments at SOE’s in the past. Logistic backlogs are a major hindrance to growth for the country and significant changes are needed to ensure smooth functioning of the economy.
South Africa’s headline consumer inflation quickened to 5.3% year on year in January from 5.1% in December. Key contributors to the annual inflation rate included food, housing, utilities and transport. With the SARB wanting to see a clearer trend of disinflation, it is unlikely we will see a rate cut in the first half of the year.
In the US, the strong earnings season continued as further evidence of economic resiliency boosted spirits. 4 of the ‘magnificent 7’ stocks reported earnings in February, all stronger than expected. And the record for the largest daily market cap increase by a single company was broken twice this month, firstly by Meta (+$197bn), on February 2nd, swiftly surpassed by NVIDIA (+$247bn) on February 22nd, both the day after their earnings releases. In total around 75% of companies have beaten earnings expectations this quarter.
The euro area started to show some more signs of an improving economy in February. Inflation fell to 2.8% in January, from 2.9% in December, in-line with expectations. Core inflation also ticked down to 3.3% in January, from 3.4% the prior month. Alongside prices falling, households were also cheered by a fall in unemployment to 6.4% in January, the lowest figure since records began. And businesses also appeared to be getting more optimistic about the future as composite PMI for February was 48.9, up from 47.9 in January. This was driven by a strong bounce in services activity, reaching 50 compared to 48.4 in January and well above expectations of 48.8. In contrast though, manufacturing dipped a little.
China saw a slight improvement in sentiment after further efforts to support the economy and market. A number of announcements were made including: reducing the reference rate for mortgages (by 0.25%); clamping down on short selling; and directing state-owned investment firms to buy up stocks of banks and other large firms.
[vc_row][vc_column width=”1/1″][us_post_date format=”jS F Y” css=”%7B%22default%22%3A%7B%22font-size%22%3A%2211px%22%7D%7D”][us_post_title tag=”h4″ css=”%7B%22default%22%3A%7B%22color%22%3A%22_header_middle_bg%22%2C%22text-transform%22%3A%22uppercase%22%2C%22background-color%22%3A%22%23c25adb%22%2C%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D”][us_post_image thumbnail_size=”full”][/vc_column][/vc_row][vc_row height=”auto”][vc_column width=”4/5″][us_separator size=”small”][vc_column_text]The start of the new year saw a moderation in the exuberance that characterized the end of 2023. Markets, which had leaned heavily towards anticipating rapid central bank rate cuts in 2024 at the close of the previous year, shifted towards the expectation of later rate cuts. January brought positive economic data, especially in the US, coupled with slightly higher-than-expected inflation figures. Central banks’ communication playing down the chances of a Q1 interest rate cut was slightly negative for bonds, causing yields to rise and prices to fall. The equity market response was mixed but generally positive for developed markets. Lingering weak sentiment in China continued to weigh on emerging markets. Tensions in the Middle East led to a slight increase in energy prices.[/vc_column_text][us_separator][vc_column_text]
SA inflation came in lower for the second consecutive month at 5.1% (YoY, December). This is positive considering that the SA Reserve Bank is running a real policy rate of 3.1%, something that can be lowered upon inflation reaching the middle of the target band (4.5%) and easing in the US. The SARB MPC maintained rates at 8.25%.
A trade surplus of R14bn was recorded in December 2023 bringing the full-year trade surplus for 2023 to R61bn (2022: R192bn). It is expected for this to continue to deteriorate as we see broad-based weakness in imports and exports.
There was an unexpected increase in private sector credit growth in December 2023 to 4.9% year-on-year. It was pushed higher by an increase in corporate credit. Slowing consumer credit dampened the figure somewhat with growth in mortgage lending, in particular, struggling due to the high interest rate environment.
Markets were treated to a barrage of surprisingly resilient economic data from the largest economy in the world. Firstly, the Q4 annualised quarter-on-quarter GDP growth figure was recorded as 3.3%, significantly above the 2% expected rise, aided by strength in exports. Businesses also appeared to be optimistic as Composite PMI stood at 52 in January, an increase from 50.9 the month before. This was driven by strong activity in both services and manufacturing. Households were not left out from the positive sentiment as 216,000 new jobs were created in December, above the 170,000 expected
Headline inflation rose to 3.4% in December, from 3.1% the prior month and above expectations of 3.2%. The Federal Open Markets Committee agreed to keep interest rates unchanged on the last day of the month and their accompanying communication almost certainly ruled out a cut in March. This and the inflation increase led to a reassessment of the likely speed of future interest rate cuts, with markets now pricing in only 1.5% of rate cuts this year (vs 2% at the start of January).
The euro area economic data continued to be largely disappointing in January. Bigger picture, Q4 GDP growth showed stagnation at 0% which, if confirmed in the final figure, would mean that the bloc narrowly avoided going into a recession (having fallen 0.1% in Q3). Composite PMI data reflected this weakness, with January showing a slight pick-up to 47.9, from 47.6 in December, but still well below the 50 neutral threshold.
[vc_row][vc_column width=”1/1″][us_post_date format=”jS F Y” css=”%7B%22default%22%3A%7B%22font-size%22%3A%2211px%22%7D%7D”][us_post_title tag=”h4″ css=”%7B%22default%22%3A%7B%22color%22%3A%22_header_middle_bg%22%2C%22text-transform%22%3A%22uppercase%22%2C%22background-color%22%3A%22%23c25adb%22%2C%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D”][us_post_image thumbnail_size=”full”][/vc_column][/vc_row][vc_row height=”auto”][vc_column width=”4/5″][us_separator size=”small”][vc_column_text]The last month of the year saw a ‘Santa rally’ across markets as investors became increasingly certain of forthcoming interest rate cuts. Three of the major developed economic areas (UK, US and euro area) all had positive news on this front, either lower than expected inflation numbers, or central banks signaling the end of the rate hiking cycle and the green shoots of monetary policy easing on the horizon. This provided a boost to asset prices across developed and emerging markets with bond yields falling, and thus bond prices rising, in anticipation of lower interest rates. Equities were buoyed by lower expected funding costs and a further uplift in positive sentiment.[/vc_column_text][us_separator][vc_column_text]
South Africa’s economy contracted in the third quarter of 2023 by 0.2% q-o-q. This was marginally lower than expected and came off the back of tepid growth of 0.5% in the second quarter. Agriculture, construction, mining, and manufacturing had the biggest falls in output. Given that these sectors employ a large amount of the workforce (particularly unskilled), their poor performance raises concerns about the risk of job losses and what that might mean for an already very high unemployment rate. Reasons for poor growth are well known however, contributing factors to poor performance from agriculture came from avian flu and floods in the Western Cape.[/vc_column_text][/vc_column_inner][/vc_row_inner][us_separator size=”small”][vc_row_inner content_placement=”middle”][vc_column_inner link=”%7B%22url%22%3A%22%22%7D” css=”%7B%22default%22%3A%7B%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D” width=”1/6″][us_image image=”2354″ align=”center” link=”%7B%22url%22%3A%22%22%7D”][/vc_column_inner][vc_column_inner width=”5/6″][vc_column_text]
SA Inflation Cools
After three consecutive months of increasing annual inflation rates, the figure for November fell from 5.9% to 5.5%. The main contributor to the downward trajectory came from lower fuel prices which outweighed still-rising food costs. Core inflation (excludes food and fuel) rose slightly to 4.5% from 4.4% in October.
The current account deficit for South Africa narrowed in the third quarter from R185.2bn to R19.3bn. This equates to a fall in the current account deficit as a percentage of GDP to 0.3% from 2.7%. The largest contributor to the decline was a sharp fall in import volumes due to weak demand and logistics bottlenecks. This was the largest drop in imports since June 2020 when countries worldwide were in the grip of covid lockdowns.
In the US, communication from the Federal Open Market Committee (FOMC) members was the biggest market-moving news during December. The FOMC maintained rates between 5.25-5.5%, but in the meeting minutes and press conference referenced that US rates had peaked, and the committee expected three rate cuts during 2024 (markets expect this to be closer to seven rate cuts). This, alongside broadly positive data releases during December, boosted market sentiment.
Headline inflation dipped marginally to 3.1% in November (from 3.2% in October), in-line with expectations; whilst Core PCE (Personal Consumption expenditures), the FOMC’s favoured inflation measure, dropped to 3.2%, slightly below expectations. In labour markets, conditions improved slightly as unemployment fell to 3.7% in November (below expectations of 3.9%) and 199,000 new jobs were created in November. Composite PMI nudged up to 51 in December, from 50.7 in November with a small tick-up in services more than making up for a fall in manufacturing activity.
In Emerging Markets, there were mixed messages on data releases for the region’s powerhouse, China. Composite PMI jumped up to 51.6 again in November following a one-month stagnation stint (50.0) during October. But deflation remained, falling further to -0.5% in November, from -0.2% in October. Property investment concerns continued with investment almost 10% down year on year.
[vc_row][vc_column width=”1/1″][us_post_date format=”jS F Y” css=”%7B%22default%22%3A%7B%22font-size%22%3A%2211px%22%7D%7D”][us_post_title tag=”h4″ css=”%7B%22default%22%3A%7B%22color%22%3A%22_header_middle_bg%22%2C%22text-transform%22%3A%22uppercase%22%2C%22background-color%22%3A%22%23c25adb%22%2C%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D”][us_post_image thumbnail_size=”full”][/vc_column][/vc_row][vc_row height=”auto”][vc_column width=”4/5″][us_separator size=”small”][vc_column_text]November saw a big rally in markets due to positive news around falling inflation and interest rate expectations. Three of the major developed economic areas (UK, US and euro area) all saw their inflation fall more than expected, effectively closing off the chance of further rate rises and potentially paving the way for those central banks to cut rates towards the middle of next year. Needless to say, lower rates also mean less chance of a recession. Markets are now pricing in rate cuts of 1-1.5% in the next 12 months in the UK, US and euro area. This provided a boost to asset prices with bond yields falling, and thus bond prices rising, in anticipation of lower interest rates; and equities buoyed by an uplift in sentiment.[/vc_column_text][us_separator][vc_column_text]
Lower revenues and higher expenditures are adding pressure to an already strained government debt profile. As government seeks to find ways to plug the hole, numerous market participants have recommended using the gains made on the central banks foreign reserve account, mainly attributable to a weakening rand. Currently the reserve account is just shy of 10% of GDP. However, the intricacies of this seem daunting particularly if one considers the independence of the central bank. It is a possible solution but it comes at a cost.
The logistics crisis compounded over the month as it was reported that over 100 vessels and 100,000 containers were stuck outside of South African ports with Durban and Port Elizabeth now among the top seven most congested ports in the world. This has direct impacts on numerous businesses which raises risks to jobs and higher prices, both of which the consumer can ill afford.
SA inflation rose to 5.9% in October from 5.4% in September notching up its 3rd consecutive increase. However, core inflation decreased to 4.4%, suggesting that the underlying level of inflation remains relatively under control. After receiving this data, the SARB MPC decided to maintain rates on hold at 8.25% but remain on high alert to the risk of rising inflation.
Inflation data out of US and Europe surprised to the downside with the UK, US and euro area all releasing inflation data below expectations. In the UK, headline CPI fell to 4.6% in October, from 6.7% the prior month and below expectations of 4.8%. US headline inflation fell to 3.2%, from 3.7% in September and below the expected 3.3%. Core inflation fell to 4% from 4.1% the prior month, also below expectations. The euro area headline inflation fell to 2.4% in November (expected to be 2.7%), from 2.9% in October; and core inflation dropped to 3.6% in November (expected at 3.9%), from 4.2% in October. This was a great relief to markets and households alike.
On the back of cooling inflation, central bankers kept interest rates steady over the month. Markets began pricing in interest rate cuts from mid-way through next year. Central bankers maintained a relatively hawkish tone on inflation in an attempt to not let markets run ahead of themselves. UK, US, and euro rates were held steady at 5.25%, 5.25-5.5% and 4.5% respectively.
From an economic perspective, 336,000 new jobs were created in the US in September, almost twice as many as expected. And this was shortly followed by the 2nd estimate for Q3 GDP showing annualized growth of 5.2%, above the 1st reading (4.9%) and above expectations (5%). This strong growth was somewhat at odds with what has been seen in the PMI data, composite PMI was unchanged for November at 50.7 with a small dip in manufacturing offset by a small rise in services
