Sabco® Investment's Monthly Market Report - February, 2023

Sabco® Investment's Monthly Market Report - February, 2023

Capital markets faced challenges in February as renewed concerns about interest rate risk came into focus. Global equities, measured by the MSCI ACWI in USD terms, fell by 2.9%, while government bonds declined by 3.5% in unhedged USD terms. Key themes during the month included:

1. Resilient global economic activity and easing inflation: Despite lingering inflation concerns, the global economy showed resilience, and inflationary pressures started to subside gradually.
2. Central banks raising interest rates: Major central banks continued their tightening policies, with further interest rate hikes anticipated in the future.
3. Kazuo Ueda appointed as the new Bank of Japan Governor: Kazuo Ueda, a former member of the BoJ Board, was announced as the upcoming Governor, set to assume the position in April.

Geopolitical developments also played a significant role in February. US-China tensions resurfaced after a suspected Chinese 'spy balloon' breached US airspace, resulting in a pause in diplomatic talks. Additionally, Russia withdrew from the New START nuclear treaty just days before the one-year anniversary of the invasion of Ukraine. Commodity prices experienced a decline, with the European natural gas benchmark reaching its lowest level since August 2021. Gold prices fell by over 5% in USD terms, influenced by the appreciation of the US dollar during the month. The US reporting season for the fourth quarter was disappointing, with corporate earnings declining by 4.8%.

Consumer spending in the US exhibited remarkable strength in January, with retail sales rebounding by 3% from the previous month. Real personal consumption expenditures also grew by over 1%. The ISM Manufacturing PMI increased to 47.7 in February, indicating improvement in the manufacturing sector. Real-time estimates for the first quarter's GDP growth tracked around 2.8% on an annualized basis. The labor market remained tight, as the unemployment rate dropped to 3.4%, the lowest level since 1969. However, average hourly earnings growth remained negative in real terms. Headline and core Consumer Price Index (CPI) rates continued to decrease, reaching 6.4% and 5.6% respectively, although the Fed's preferred inflation measure, the Personal Consumption Expenditures (PCE) deflator, showed a slight increase in January. The Federal Reserve raised its target rate range by 25 basis points to 4.5-4.75% and signalled further tightening to come.

Economic activity in Europe showed positive signs, with the eurozone and UK Composite Purchasing Managers' Indices (PMIs) expanding at a faster pace, mainly driven by the service sector. Recession forecasts for this year were revised away, and the European Commission raised the EU's growth forecast for 2023 to 0.8%. The UK narrowly avoided a year-end recession, while the eurozone and UK experienced a decline in headline inflation rates in January. However, euro area core inflation reached a record high of 5.3%. The European Central Bank (ECB) raised its deposit rate by 50 basis points to 2.5% in February, with indications of a similar-sized hike at the next meeting. The Bank of England (BoE) increased its base rate by 50 basis points to 4% and upgraded its economic projections. The UK also reached a new post-Brexit trade agreement with the EU concerning trade arrangements with Northern Ireland.

Despite underperformance in Chinese equities, economic indicators in China showed signs of recovery, with the manufacturing PMI rising to 52.6 and the non-manufacturing PMI increasing to 56.3. Multiple major earthquakes struck Turkey, and the full impact on human lives and the economy was yet to be determined. Japan's headline inflation rate reached 4.3% (year-on-year), the highest reading since 1981. Kazuo Ueda, a former member of the Bank of Japan (BoJ) Board, was announced as the next Governor, set to begin his tenure in April.