Market overview: December 2022

In December, market sentiment turned bearish again after two months of risk-on sentiment, as selling pared October-November gains. Developed equity and bond markets ended the year in substantially negative territory, bringing to an end the long bull market that started with the recovery from the 2008 Global Financial Crisis. During the month, the US Federal Reserve maintained its tough anti-inflationary stance, hiking interest rates by 50bps as expected (a lower amount than previous increases) and lifting its interest rate forecast for end 2023 by 0.5%, to 5%-5.25%, a more hawkish signal. Other major central banks followed the Fed’s lead, with each saying they expected to continue tightening monetary policy in the months ahead. Growth forecasts for the US now centre around less than 1.0% GDP growth in 2023, while those for the UK and Europe call for relatively short and shallow recessions.

Making conditions more uncertain during the month was the Chinese government’s lifting of its strict zero-Covid policy in response to widespread public protests. Although this raised prospects of faster economic growth ahead as consumers and businesses were freed up to spend and conduct business, the emergence of a large new wave of Covid infections dampened the positivity. Economists expect it to detract from current growth projections in 2023, with forecasts of upwards of 1 million deaths.

Looking at global equity market returns (all in US$), the MSCI All Country World Index returned -3.9% for the month. Emerging markets outperformed developed markets, with the MSCI Emerging Markets Index producing -1.4% and MSCI World Index returning -4.2%. The Bloomberg Global Aggregate Bond Index (US$) delivered 0.5%, and for the year as a whole, global bonds were no safe haven for investors, returning -16.2% in US dollars. In global property, the EPRA/NAREIT Global REIT Index (US$) produced -3.4% in December and -24.5% in 2022.

The spot price of Brent crude oil gained 0.6% in December, ending the month at around US$83 per barrel amid mixed signals and uncertain demand and supply levels. For 2022 as a whole, it was 10.5% higher. Metals prices were mixed for the month, with nickel returning 14.8%, copper 2.3%, gold 3.6%, aluminium -1.1%, palladium -4.7% and platinum 5.4% (all in US$).

US

In the US, following the Fed’s FOMC result, markets now expect more interest rate hikes ahead in 2023. This came despite falling CPI (at 7.1% y/y in November), as price increases became more entrenched and widespread, seen in rising services costs and wages, for example.

Meanwhile, after rising 3.2% y/y in Q3 on the back of surprisingly strong consumer spending, US economic growth for all of 2022 is forecast at around 1.9%, before slowing to below 1% for 2023. Data showed the US housing market is already slowing meaningfully and is expected to be a significant factor in the slowdown. However, consensus projections are for a relatively mild and brief recession lasting for the first three quarters of next year.

Although global bond markets remained unusually volatile, the Bloomberg Aggregate US Treasuries Index returned 0.7% in US$ in December, for a total return of -17.5% for 2022. This was its weakest result for many years. The US yield curve ended the year inverted as shorter-term rates moved higher than longer-term rates, reflecting the greater sensitivity of the former to interest rate moves.

Meanwhile, US equity returns were in the red in December: in US$, the Dow Jones produced -4.1%, the Nasdaq delivered -8.7%, and the S&P 500 returned -5.8%. In what was a terrible year for investors, the S&P 500 recorded a -18.1% total return for 2022, the worst since the 2008 Global Financial Crisis.

South Africa

On top of the negative global sentiment, ongoing loadshedding and a spike in political risk in early December (on reports that President Cyril Ramaphosa might resign), exacerbated the poor conditions locally. However, the latter incident had only a short-lived impact on SA markets: SA bonds and the rand fully recovered from the 1-2 December market sell-off following the party’s mid-December elective conference, where ANC members rallied behind Ramaphosa and he emerged even stronger than before, with more ANC Executive Committee members supporting his economic reform agenda. This helped lower political risk for investors.

With the SARB not meeting in December, financial markets are expecting the central bank to follow the US with a 50bp interest rate increase at its January MPC meeting, with the chance of a pause after that. The expected slowdown in the rate hiking cycle was reinforced by a fall in November CPI to 7.4% y/y from 7.6% y/y previously.

In other positive news, December reports showed that South Africa’s Q3 real GDP growth surprised to the upside at 1.6% (q/q annualised), led largely by higher agricultural production. By the end of the period, the size of the SA economy had finally exceeded pre-pandemic levels. However, in its December Quarterly Bulletin, the SARB estimated that Q3 real GDP growth (quarterly) had likely been reduced by 2.3 percentage points due to the high intensity of power cuts. For the year to end-October, it said, loadshedding had occurred 33.4% of the time, or an average of 10.4 calendar days per month.

The SARB’s latest projection was for 1.8% GDP growth in 2022. This was due to still-elevated inflation, rising interest rates, subdued consumer demand, slower global economic growth, the war in Ukraine and the impact of loadshedding.

Amid the renewal of negative sentiment, SA equities lost ground during the month: the FTSE/JSE All Share Index (ALSI) returned -2.3% in December, and the Capped SWIX -2.8% (both in rands). Listed Property shares were the strongest performers with a 1.1% return (All Property Index), while Resources delivered -3.6% (Resources 10 Index), Industrials -0.3% and Financials -5.7%.

For the 12 months to 31 December, it was a story of strong outperformance for SA equities versus global equities, as the ALSI returned 3.6% in rands, and -2.3% in US$, outperforming the -18.4% recorded by global equities (the MSCI All Country World Index), and the -20.1% recorded by the MSCI Emerging Markets Index (both in US$).

SA bonds (FTSE/JSE All Bond Index, ALBI) delivered 0.6% in December, close to the return of global bonds, and for the 12 months to 31 December, local bonds (ALBI) outpaced global bonds with a return of 4.3% versus -11.2% (in rand terms). Inflation-linked bonds (ILBs) produced 2.6% and cash returned 0.6% in December.

Finally, the rand posted a mixed monthly performance, ending flat against the US$ but depreciating 0.8% against sterling and 3.0% versus the euro. For 2022 in total, the local currency lost 6.0% against the strong US$, but strengthened 5.3% versus sterling and was basically flat against the euro.

UK and EU

In the UK, the Bank of England (BoE) raised its key interest rate by 50bps to 3.5%, in line with forecasts. Meanwhile, November CPI eased to 10.7% y/y vs October’s 11.1%, largely due to falling energy prices. The Bank indicated more hikes are likely into 2023 in its bid to curb inflation despite the negative impact on growth. The BoE still believes the economy is headed for recession lasting for all of 2023, with GDP projected to contract by 1.4% in 2023 and CPI declining to 7.4%. Finally, new Prime Minister Rishi Sunak’s sweeping new budget plan was greeted more favourably than Liz Truss’s disastrous September mini budget, proposing higher taxes and lower spending in an effort to reduce the government’s substantial debt levels. For December, the FTSE 100 returned -0.5% in US$, and -7.0% for 2022 as a whole.

Turning to the Euro Area, the European Central Bank (ECB) followed the US and UK with its own 50bp hike in December, suggesting similar-size hikes at its next two meetings. Eurozone inflation fell to 10.1% y/y in November from a record 10.6%, as energy costs eased. The ECB still expects a short and shallow recession in 2023 as the energy crisis is seen weighing heavily in the shorter-term, especially while the Ukraine-Russia war drags on: it downgraded its expectations for the region’s GDP growth to 0.5% in 2023 (from 0.9% previously), while in 2024 it is still projected at 1.9%. Governments are still implementing stimulus for their economies in the form of supplemental spending programmes and energy price supports such as subsidies and price caps. In France, the CAC 40 returned -0.3% for the month, and -12.4% for 2022 (in US$). Meanwhile, Germany’s DAX delivered 0.2% for December and -17.4% for 2022 (in US$).

China and Japan

In China, it was a fairly chaotic end to the year as the government responded to widespread social protests against its strict zero-Covid policy by removing almost all restrictions. However, this came as a new wave of Covid infections was spreading, with some projections that it could result in upwards of 1.0 million deaths, given the vulnerability of the population and fears that it would spread widely during the Chinese New Year travel period. Although economists welcomed the move to help free up the economy and kick-start growth, the uncertain impact of the virus weighed negatively on markets. Ongoing property market weakness also undercut consumer and business sentiment.

The People’s Bank of China (PBoC)’s benchmark lending rates were unchanged in December; however, the Bank pledged to support domestic demand and is working together with the government and its spending initiatives to stimulate growth. The yuan regained some ground against the US dollar after having hit a 13-year low against the currency in September, but still ended 2022 roughly 8.5% weaker against the greenback for the year. The ongoing monetary policy divergence between China and the US has placed pressure on the yuan to depreciate and caused some capital outflows.

Meanwhile, consensus forecasts for China’s economy call for only 3.3% GDP growth in 2022, far below the government’s 5.5% target and the slowest since the 1970s. For 2023, a new government target of 4.5%-5% is reported to be most likely, but many consider this optimistic. Hong Kong’s Hang Seng produced 6.5% for the month and -12.6% in 2022 (in US$). The MSCI China returned 5.2% in December and -21.8% in 2022, both in US$.

Turning to Japan, the Bank of Japan (BOJ) surprised markets in mid-December with its first effective interest rate hike of the current cycle, raising its 10-year bond yield range by 0.25% to 0.50% after long periods of stability. It left its short-term benchmark rate unchanged. This triggered equity and bond losses globally over fears that Japanese investors could start moving to hold more Japanese bonds and selling their large holdings of US Treasuries. It also sparked a 3% gain in the yen on the day. The market had been pricing in no rate increases through 2023. Finally, the BOJ revised downward its real growth outlook for 2022 to 2.0% from 2.4% previously, and for 2023 to 1.9% from 2.0%, but no recession is expected. Following most other global equity markets lower, the Nikkei returned -1.2% in US$ in December and was down 19.1% for the year.