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Persistent resilience

Trends across the main economic regions accelerated in February, particularly in the US where employment data was again resilient. China showed signs of recovery with better-than-expected export data in January and February; however, the outlook remains uncertain. Back home, continued infrastructure challenges and heightened uncertainty ahead of elections weighed on sentiment in South Africa and the annual Budget speech did little to shift the current muted outlook. The local market is clearly looking for delivery.

US markets soared, achieving new record highs, again largely driven by a small concentration of companies exposed to the AI theme. China’s equity market finally rose again, lifting EM performance while Europe and UK equity markets delivered weak performance as company earnings disappointed.

The US is still hiring

US economic data provided proof of ongoing strength in February as 275,000 new jobs were added to the economy exceeding analysts’ expectations. However, wage growth which had previously been outpacing inflation appears to be slowing in February. Inflation, at 3.1% in January, although trending lower, remains well above the US Fed’s 2% target. This suggests expected rate cuts will be implemented “later rather than sooner”.

US earnings season continued into February with many reported company earnings exceeding analyst consensus expectations. This drove another market rally and the S&P 500 was up over 5% for the month. US valuations remain elevated, however there are specific opportunities within certain sectors.

Faded market enthusiasm around the pace of rate cuts drove US bond yields higher over the month while the view that rates will be higher for longer supported US Dollar strength.

Chinese New Year spirit

The Chinese economy has remained relatively sluggish over the last year however, newly released trade data shows the world’s second largest economy might be recovering with exports in January and February sharply up. It’s still too early to gauge if this is a temporary surge or a sign of recovery, particularly given the weak outlook on demand for goods, poor consumer confidence and continued geopolitical tensions.

Chinese equity markets rallied significantly after the local new year and off the back of new interventions from the Chinese government to support the equity market.

Japanese equity markets also rose despite weaker economic growth in the region as the Japanese market continued to gain confidence following business friendly policy changes.

South Africa lacking activity and action

Economic activity was once again subdued in February and although data showed retail sales lifted year on year to end December, this was off a low (loadshedding) base. Inflation proved sticky and while food inflation is lower than a peak of 14%, it remains high at 7,7% weighing heavily on consumer wallets. Again, we note that the potential for interest rate cuts later in the year may provide some relief, however with the US stalling rate cuts, a prolonged period of higher local rates is likely.

The annual SA Budget speech did little to change sentiment as a slow economy continues to weigh on the revenue line. Furthermore, more plans with few proof points to support implementation did little to drive a shift in outlook. Positively, loadshedding is slowly improving, evident in comparative figures for the first two months of 2023. And container congestion in Durban port is easing, opening up economic activity. Poor logistics remains a significant challenge to South Africa’s growth outlook and the announcement of new leadership at Transnet provided markets with a confidence boost. The appointment of Michelle Phillip’s as Transnet’s new CEO demonstrates a commitment to driving the SOE’s recovery plan.

SA’s economic outlook remains subdued and the political landscape uncertain creating significant risk to investors. However, despite the need for sustained action to reform failing infrastructure, there are some reasonably cheap investment opportunities. Certain offshore exposed businesses are also trading on reasonable valuations and offer diversification away from domestic challenges.

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