December was a month of more risk-off trading than risk seeking behavior, in contrast to the rest of the quarter. We saw the end of what has been a very volatile year and it seemed like almost everyone was just looking forward to putting their feet up and relaxing.
The risk-off sentiment was helped by the FED retaining their hawkish stance even though inflation has seemingly turned the corner. This was concerning for investors, especially those worried about a deep global recession, as it now looks like the FED will keep rates high for longer than anticipated. This put more pressure on the global economy in general as most other monetary policymakers had no other choice but to keep pace with the hiking cycle of the FED.
Overall, the negative risk sentiment and hawkish FED meant that the US Dollar remained strong, gaining back some losses versus most other currencies. In the UK, the news of Rishi Sunak being appointed as Prime Minister was met with some optimism, as the market recovered from a tumultuous time under his predecessor. Some more good news came out of Asia as China decided to relax their Covid restrictions even more, leading to further opening of their economy and trade. It is unclear how much of this will stay, however, given that any rise in infection rates might cause the government to tighten up again (as they have done in the past). This flip-flop behaviour meant that, whilst being very optimistic about the news of economic reopening, investors didn’t jump on the risk-on bandwagon just yet.
Looking locally, the month of December was overwhelmed by the ANC elective conference and the impact it might have on the economy. As many suggested, the lead-up to the conference was a lot more inflammatory than the actual event turned out to be. With Phala-Phala cries, Zuma court cases and RET disruptions taking center stage, it was rather refreshing to see the outcome of the conference weighing in favour of President Cyril Ramaphosa being elected as ANC party leader for a second term. Although this was overwhelmingly positive for the general economic outlook, the global risk-off environment and recession fears had the majority say, as the JSE All Share Index ended the month negative -2.26%.
Our view on asset classes remains neutral to positive on risk assets despite the December downturn. We remain slightly overweight South African (and some Emerging Market) risk assets and neutral on global risk assets. This has been a negative contributor in December, but overall returns for Q4 2022 have been above par and we feel confident in our exposure to risk assets (and all asset classes) going into 2023.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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