Fourth Quarter 2022 – An article by Rutherford Asset Management
Current Outlook – Global Slowdown
Portfolio Position – Cautious
The global economy continues to slow as high inflation has forced central banks around the world to raise interest rates and tighten monetary policies. The era of easy money has ended, and we are now in a period of higher inflation and lower growth. The UK is already in a recession, and the Euro zone and the USA are expected to enter recessions before the end of the year.
South Africa
The JSE Alsi is down 13% for the year so far. Global markets have tumbled as rising interest rates reduce liquidity and economic activity.
The Rand started the year strongly, but over the last few months has weakened against the US Dollar and is currently at levels of R17,75. US Dollar strength is typical at this stage of a global risk-off cycle and the US$ has been extremely strong against all major currencies in 2022.
The South African Reserve Bank raised the repo rate by 0,75% in September to 6,25%. This is the sixth consecutive increase for the current cycle and is due to increased inflation. The market expects a smaller hike of 0,25% in November as we near the expected top of this interest rate cycle.
The first half of 2022 saw SA return to improved economic growth driven by higher commodity prices. However, growth is now disappointing again as the global economy slows and loadshedding hampers business. The trade surplus fell to R 7,2 billion in August.
SA Inflation eased to 7,6% in August from a high of 7,8% in July. Expectations are for inflation to moderate to 5% in 2023.
Developed Markets
US equity markets are down nearly 24% from their December highs due to the Federal Reserve reducing its balance sheet and sharply raising interest rates.
Inflation in the US eased to 8,3% in August from its high of 9,1% in June. The US Federal Reserve inflation target is 2%, so even though inflation now shows some signs of moderating, it is far from being under control.
Inflation in the UK is 9,9% and in Europe it is now 10% and continues to accelerate as winter approaches and the energy crisis starts to bite. Europe and the UK are expected to endure deep recessions over the next two years.
The US Fed raised interest rates by 0,75% in September to 3,25% and expectations are that rates need to rise by a further 3% over the next 12 months to bring inflation under control. The Fed is now shrinking its balance sheet by $95 billion per month, which puts further pressure on asset prices.
The US$ is still the global safe haven in times of uncertainty and as such has strengthened significantly against all major currencies in 2022, reaching parity with the Euro and record highs against the UK Pound.
The US Federal Reserve has aggressively raised interest rates in an effort to control inflation and central banks around the world are following suit. This is leading to a global economic slowdown, widespread recessions and equity market corrections.
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