An unprecedented environment of central bank hikes this year means that the roadmap for the bottom of the current bear market is unlike any bottom we’ve seen before. With investors unsure of what to make of the current path of policy tightening and the impact of growth, the cyclical turning point going into 2023 is looking murky. However, things are looking up for South Africa in comparison to developed markets.

This was the message from Old Mutual Investment Group (OMIG), whose presenters today unpacked their market and economic expectations for 2023 following another rollercoaster year for investors and flagged that there are still important markers that we can track that might signal the elusive inflection point as we enter the New Year.

“While we respect the historical analysis of a typical bear market pattern, the anatomy of the current bottom of the market shows little resemblance to prior bottoms,” said Jason Swartz, Investment Strategist at OMIG. “In addition to the uncertainty that investors are experiencing regarding the monetary policy path and interest rate cycle, there is also the impact of China to consider and the significant implications that the reopening of its economy will have on not only global growth, but on the recovery of emerging markets, the rand and domestic equities. These factors will be key markers to watch in signalling the market’s turning point.”

OMIG Chief Economist, Johann Els, points out that global interest rates are seeing one of the most synchronised tightening cycle seen in decades, bar Asian interest rates, which are still looking much lower than developed markets. The recent downside surprise in US inflation brought markets a sigh of relief as the Fed’s likely policy pivot became somewhat clearer. The slowing underlying pace of inflation combined with further downside surprises in PPI inflation – and likely in the PCE deflator as well – should cement a 50bp rate hike by the Fed in December. This could – depending on the dataflow – be followed by a final 25bp rate increase in January. Either way, rates are in peak territory, he says.

“There are increasing signs that global inflation is in peak territory and headline inflation rates should roll over soon, even as core inflation remains sticky for a while longer,” he says. “However, inflation will take some time to get back within target and therefore interest rates are not going back to zero any time soon. The environment is therefore ripe for policy error, with this risk rising – from the US Federal Reserve in particular – which could cataylse a sharp growth slowdown or recession,” Els warned.

Looking at market opportunities, Swartz highlights that while global equities are facing a host of tailwinds from peaking inflation, they will not see these tailwinds support valuations materially until a set of conditions are met. “Global earnings still need to reset materially lower, while PMIs need to fall to some range in the low forties and the Fed needs to 'actually' pivot,” he says. “Within global equities we are finding the best value outside of the US, such as South-East Asia and other Emerging Markets. But for now, we prefer global bonds and have been buying where yields are attractive and competitive relative to equity yields, which has offered our portfolios some recession protection,” he says.

Els believes that the US dollar has also reached its peak strength, with the Fed’s messaging around interest rates set to cap further strength. “The dollar has remained stronger for longer as a result of the Fed’s higher for longer rates messaging, but we’re likely entering peak dollar territory and I expect some gradual weakening over the next year,” he explains.

Els’s forecast for global growth is for 1% from the US in 2023, 0.4% from the Euro Area and 5% from China, while his inflation expectations are for 3% for the US, 2.4% for Euro Area and 2.5% for China. “The US and the Euro Area will likely see another 75bps in rate hikes, with 50bp in December and 25bps in January, while Chinese policy should remain expansionary for both fiscal and monetary policy, as well as Covid policies.

South Africa’s prospects are looking remarkably better than the global environment, according to both presenters. Els outlined his forecasts for SA next year where he expects 2% growth and inflation to fall back within the target range at 4.5%.

“SA is in a far better position than when previously facing a similar set of global circumstances, with our growth story actually looking better this year, despite the flooding, severe loadshedding, Transnet strike action and global growth slowdown that has been battering our economy,” says Els. “The global slowdown will still take its toll on us, but it will be less severe than before.

“We should also expect lower inflation from this point, coming back within the target range by early next year; while the SA interest rates cycle is also close to the end, with the sharp fiscal improvement that we’ve seen recently likely to drive ratings improvements,” he adds “The rand’s recovery has also begun, and we still foresee SA’s medium-term growth on an uptrend going into next year.”