This month’s market update comes to our valued clients courtesy of Matrix Fund Managers:
A confluence of malign reinforcements
The modest rebound in risk appetite in March proved mere respite as April brought broad-based market weakness. Investors’ concern shifted from stagflation to recession as headwinds intensified.
Tightening financial conditions leading to alternatives
The Fed turned more hawkish in its rhetoric, leading the market to price in some prospect of 75bp increments at the near-term FOMC meetings. In addition, pending quantitative tightening and a decline in liquidity further boosted US yields and the dollar.
High US yields and a strong dollar have historically led to a more trying time for risk assets. While this is
usually ascribed to a higher discount rate and resulting lower valuations, the bottom line is that defensive
asset classes, such as Developing Market bonds, are becoming investable again. In short, it is now longer a case of TINA (there is no alternative).
The war in Ukraine has proven to be more durable, in contrast to earlier expectations that this would be a
quick victory for Putin. Sanctions have broadened, and many countries have begun the process of weaning their economies off Russian energy. While this may ensure supply that is more reliable in the long run, short-term provision remains tricky.
Cyclical slowdown exacerbated by China lockdown
Many argue that if were not for the lockdowns in China, the oil price would be much higher. On the flip
side, China’s zero-Covid policy is again contributing to various supply chain constraints at a time when
demand, particularly in the US, remains resilient.
The Chinese renminbi weakened sharply in the second half of April, sparking fears of a devaluation to limit downside to China’s growth. However, the weaker yuan reflects market fundamentals to a large degree, as the narrowing yield differential between China and the US has prompted portfolio outflows.
Central banks playing catch up
The shift in the inflation outlook from the start of the year has resulted in many central banks, particularly
in developed markets, having to play catch-up. Yet even though normalisation has begun, policy rates
remain low in nominal terms and deeply negative in real terms. Thankfully, many emerging markets,
particularly in LatAm, are well into their hiking cycles, with forward-looking real rates stabilising or even
moving into positive territory.
Some may argue that the SARB is a laggard, but it is not a case of being behind the domestic inflation curve. Rather, the Bank needs to be cognisant of global liquidity dynamics to prevent exchange rate weakness that could exacerbate cost-push inflation.
Hoping for a soft landing to balance demand with supply
The slowdown in global liquidity growth has already translated into moderating asset price momentum and should lead to weaker activity levels. Tempering global growth is required to better align demand (which is sensitive to monetary policy) with supply (which remains constrained) to put a break on the rate of inflation.
Until this happens, earnings expectations may not fully reflect the headwinds of the strong dollar, rising
borrowing costs, high input costs (energy and wages), and lower liquidity. The question now is whether
policy makers can achieve the historic feat of a soft landing.
Market developments
During April, inflation-linked bonds (1.9%) was the only asset class to beat cash (0.4%), while listed property (-1.4%), fixed-rate bonds (-1.8%), and equities (-3.9%) ended in the red. The rand lost 7.3% against the US dollar, which would have been accretive to offshore returns.
