MARKETS IN A NUTSHELL - APRIL 2023
Despite further turmoil and concerns for slowing global growth, most global equity markets advanced in April. The US S&P500 Index even bounced back to levels last seen in February — before the regional banking crisis took hold. But speculators buying the rally may since have found themselves to be April fools, with April’s rally already erased in May.
Early hopes that the Fed had contained the US banking crisis soon evaporated. Another regional US bank — First Republic Bank — reported in a first-quarter earnings release that its customers had withdrawn over $100 billion in deposits following a ratings downgrade in March. With a balance sheet full of municipal bonds, the bank could not fully access the Fed’s emergency lending programme. The Federal Deposit Insurance Corporation closed and sold the bank to JP Morgan on 1 May, triggering the second-largest bank collapse in US history.
Falling asset prices and deposit outflows irreparably squeezed First Republic. For depositors, the move from low-yielding bank accounts to alternatives such as money market funds seems an easy decision. Even iPhone maker Apple has joined the fray, launching a savings account offering 4.15% — more than 10 times the average US savings account rate. Customers have pulled approximately $800 billion in deposits from US banks since March 2022 when the US Federal Reserve first started raising rates. This trend poses an ongoing threat to thousands of regional US banks.
Meanwhile, a weak GDP print showed that the US economy was slowing even before the banking crisis. The economy grew 1.1% year-on-year to 31 March, down from 2.6% at the end of last year and less than the 2.0% economists were expecting. Frustratingly, core inflation printed at 5.6% — still uncomfortably above the Fed's 2% target.
The fed funds futures market is pricing in possibly the most anticipated recession in market history — with the market expecting 150 basis points of rate cuts in the next year. But with wage growth still above 5% and the labour market still strong, it may be premature to call an about-turn in the Fed's most aggressive tightening campaign in three decades.
Across the pond, headline inflation in the euro area and UK moved lower, but core inflation rose to 5.7% in the eurozone and was unchanged at 6.2% in the UK. In its biannual World Economic Outlook, the IMF warned of a ‘hard landing’ for the global economy if persistent inflation keeps interest rates higher for longer and amplifies financial risks.
For low-income economies, the steep rise in global borrowing costs has resulted in the highest bills for servicing foreign debt in 25 years. Repayments on public debt for a group of 91 of the world’s poorest countries is set to rise to 17% of revenue next year. This is the highest number since 1998, diverting spending from critical areas such as health, education and infrastructure. In South Africa, that number is even worse at close to 20%.
Chinese bourses fell in April as geopolitical tensions weighed on investor sentiment, despite economic growth expanding faster than expected in the first quarter. China's GDP growth shows continued rebound from the pandemic and is on track to meet the government's 2023 target of 5% growth. The retail sector drove economic growth as consumers rushed back to shops and restaurants after being couped up during COVID-19 lockdowns. Foord funds — with investments in the technology and consumer discretionary sectors — are well-positioned to benefit from this trend.
In South Africa, JSE indices tracked global indices higher, with gains across all major sectors. The bond market was weaker after SARB’s latest 50 basis point rate hike and the rand depreciated against the US dollar. Not unexpectedly, the Foord SA and global funds lagged peers in the mini rally but remain conservatively positioned against a myriad of global risks, with ultra-low exposure to global bank equities. The Foord fixed income funds are focused on credit quality with a preponderance of floating rate assets.
Irrespective of whether global interest rates remain elevated or fall rapidly from here on slowing or negative growth, the era of easy money is clearly over. The unintended consequences of cheap money will continue to ripple through the global system, creating wide dispersion among companies, sectors and geographies.
Given the fragility of the system and wide range of potential outcomes, Foord’s investors can take comfort that our process prioritises risk management and the protection of investor capital. The companies we invest in are those with resilient business models, secular growth prospects and management teams that can manage any curveballs. Prudent allocations to safe havens such as gold should also contribute to the delivery of safe investment returns.