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As the year draws to a close, it is worth thinking about what next year could have in store for us. The most key factors will be systematic rather than unsystematic. In other words, the major trends in markets, commodities and currencies will be more important than the prospects of individual equities. In this article, we will consider three particular international trends that will be important to private investors:
 
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<figure class="figure"><a class="lightbox" href="/onlinecourse/images/Oil_Dec17Art22.png" data-plugin-options="{'type':'image'}"> <img class="figure-img img-fluid" src="/onlinecourse/images/Oil_Dec17Art22.png" /></a>
<figcaption class="figure-caption">North Sea Brent Oil: December 2019 - 16 December 2022. Chart by ShareFriend Pro.</figcaption>
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Following the COVID-19 low in April 2020, the oil price made a strong recovery which was topped off by the war in Ukraine. That was followed by a “double top” and then a new downward trend. The downward trend, in our opinion, has been fuelled by the impending recession in the world economy, the acceleration of renewable energy solutions and the fact that the war in Ukraine appears to be reaching an end. All three of these factors are likely to continue into the new year – and so we expect oil to continue to be under pressure in 2023.
 
The Rand
Our currency has been on the whip-end of a variety of local and international forces during 2022, but remains, in our view, underpriced against the major first world currencies and especially the US dollar. Consider the chart:
 
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<figure class="figure"><a class="lightbox" href="/onlinecourse/images/Rand_ArT17dEcember22.png" data-plugin-options="{'type':'image'}"> <img class="figure-img img-fluid" src="/onlinecourse/images/Rand_ArT17dEcember22.png" /></a>
<figcaption class="figure-caption">South African rand/US dollar: February 2022 - 16 December 2022. Chart by ShareFriend Pro.</figcaption>
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The chart shows the weakening channel within which the rand has been trading since February 2022. In our view, this is a direct consequence of the bear trend which has been in place in international equity markets this year - and the consequent shift towards “risk-off” which has dominated international investment sentiment. This, in turn, has been a function of rising interest rates in first world countries – a pattern which we see continuing in 2023. Our expectation is that the rand, despite fluctuations, will continue in the pattern for the foreseeable future. Of course, local political factors will have a short-term impact, some good and some bad, but the direction of the trend seems inevitable. It is worth noting that the rand has been weakening against the US dollar in line with other first currencies like the euro and the British pound – so in relative terms it has been doing very well.
 
America
The equity markets of the world, including the JSE, follow what is happening on Wall Street and the S&P500 index. And that index is firmly in a bear trend. Consider the chart:
 
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<figure class="figure"><a class="lightbox" href="/onlinecourse/images/sp_aRt17DeC22.png" data-plugin-options="{'type':'image'}"> <img class="figure-img img-fluid" src="/onlinecourse/images/sp_aRt17DeC22.png" /></a>
<figcaption class="figure-caption">S&P500 Index: December 2021 - 16 December 2022. Chart by ShareFriend Pro.</figcaption>
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The bear trend is strongly confirmed by the failure of the index to once again penetrate its downward trendline, creating a fourth touch point. The three rallies during the year show the misplaced optimism which still exists in the market since the Ukraine war initiated this bear trend about 18 months early, in our opinion.
In the latest rally culminated in two intraday highs of 4100 on 1st and 13th December 2022 where the index created a “double top”. It has been falling ever since as the bears gained ascendancy over the bulls. Closing at 3852 on Friday last week, it has now broken down clearly through the support level at 3900, a further bearish indication.
We expect the S&P to continue falling now into the new year, ultimately reaching a new lower low, below the low of 3577 reached on 12th October 2022.
From a fundamental viewpoint, the Federal Reserve Bank is determined to bring inflation in America below 2% - and inflation is still about 3,5 times that level. There are some early signs that the pattern of rising interest rates is beginning to have an impact, especially in the property market, but the strong employment numbers and record low unemployment levels remain a problem.
In our view, interest rates will continue to rise, albeit at a slower pace in 2023 – and the cumulative impact of these rate hikes will begin to significantly impact S&P500 corporate profits and valuations during the year.
In other words, this bear trend is far from over. There are still far too many bulls out there. They need to lose hope, literally give up, before the trend turns. That point, the moment of “capitulation,” does not seem imminent to us. The US economy will likely fall into recession next year and the Federal Reserve Bank will be unwilling to reduce rates until they are quite certain that the inflation genie is once again returned to its bottle.
While this drama unfolds, private investors are well-advised to stay out of the equity market. They should remain in cash and simply wait patiently for events to reach a turning point. When that time comes, they will be able to buy high quality shares for a fraction of their inherent value.
 
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We wish you and your family all the best over the Festive Season.
The next article will be published on the 9th of January 2023.
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