VIDEO: Market Snapshot February 2023

Our Market Snapshot provides an overview of key events that influenced financial markets over the course of February 2023.

February proved to be a mixed, but broadly negative, month for South African financial markets, driven by the stronger-than-expected US market data that confirmed higher and more widespread inflation, more robust retail sales and industrial production, and a still-improving labour market. These combined to shift global market sentiment back to a view of “higher interest rates for longer”, which the US Federal Reserve confirmed in subsequent comments, sending bond and equity prices lower around the world. Emerging markets underperformed developed markets, and South Africa was unable to escape the sell-off, especially the fall in commodity prices that accompanied the deteriorating sentiment.

Although M&G Investments’ portfolio performance reflected these bearish moves, our cautious global view, positioned for just such a scenario, paid off to some extent. You can read more about this view in this article by Sandile Malinga. Our flagship SA multi-asset funds and global feeder funds delivered positive returns in rand terms for the month. Our global holdings were among the largest contributors to the positive performance, with a particularly strong outcome from the M&G Global Equity Feeder Fund amid the risk-off sentiment: it returned 5.7% compared to the 3.2% median of its ASISA category peers (in rands). In fact, once again, most of our funds outperformed the median returns of their ASISA category peers for the past 12 months to 28 February 2023.

In what was an eventful month in South Africa, financial markets greeted the 2023 National Budget favourably for its improved government deficit targets and the proposed restructuring of Eskom debt. However, this good news was short-lived due to the country’s grey-listing two days later by the Financial Action Task Force (FATF), a global financial watchdog. Speculation over its negative impact dominated the market for a few days, but on the day bonds actually gained ground and the rand was little moved. South African bonds (ALBI) recorded only a -0.9% loss for the month. While the rand did lose a meaningful 5.4% against the US dollar in February, this was at least partly attributable to USD strength on the back of the “higher interest rates for longer” view, as well as the negative sentiment stemming from ongoing loadshedding. If you missed our most recent (1 February) newsletter, you can read about our view on South Africa’s grey-listing here.

And while the impact of loadshedding has been, and will continue to be, very damaging for the South African economy and local businesses, there are some companies that are being impacted less than others. Learn more about how we’re factoring the power outages into our stock choices in this article by Ross Biggs and Chris Wood.

Valuations of both South African bond and equity markets remained materially more attractive than their global counterparts in February, and our portfolios are tilted towards stocks in sectors that will do well from an economic recovery. As 2022 demonstrated, valuations can provide a useful buffer in periods of distress (although this is not always the case).

For now, we believe patient investors will be rewarded by waiting out market weakness and volatility caused by sudden changes in market sentiment like we experienced in February. Uncertainty remains high, and such times are testing for investors. From experience, however, we know that holding attractively valued and well-diversified securities can help protect the downside, but that it can also take time to unlock the value in these assets. We believe our portfolios are still well-positioned to offer attractive, above-market returns over time for our clients.