Global equities climbed steadily in the first half of March but came under pressure from mid-month with several factors weighing on sentiment. Market participants are becoming increasingly concerned over higher inflation and possible complacency from central banks on the matter.
* 28 February to March 2021
United States (US) Sino tensions intensified, and other Western nations have also threatened sanctions on human rights abuses in the Xinjiang province. Meanwhile, a painfully slow vaccine roll-out in Europe has resulted in “third waves” fears. This was capped by volatility after Turkish President Erdogan fired yet another central bank head for rising interest rates to combat inflation. Still, a push into month-end saw the MSCI World end March 3.1% higher. For the quarter, global equities returned 5.0%.
Risk-off sentiment saw US treasury yields rise and the US dollar strengthen. The JSE and local bonds moved in line with global markets, but the rand remained firm against most major currencies. For the quarter, the local market has returned 13.2% in rand terms and 12.5% in US dollars.
Economic data overview
United States data released in March largely surprised to the upside. The ISM Manufacturing Purchasing Managers’ Index (PMI) jumped to 60.8 index points in February from 58.7 in January and registers as the strongest print since February 2018. The upturn was predominately led by new orders and production subcomponents. Notably, the prices paid subcomponent climbed to the highest reading since July 2008, coming in at 86 index points from 82.1 the previous month. The ISM Service PMI slowed to 55.3 index points in February from 58.7 in January as business activity, new orders and employment increased at a more moderate pace. Similar to the manufacturing sector, the prices paid subcomponent accelerated to 71.8 index points from 64.2 in January. Construction spending rose on a sequential basis for the fourth consecutive month, climbing 1.7% month-on-month in January from an increase of 1.1% the previous month. Non-farm payroll employment accelerated by 379 000 in February after climbing 166 000 the previous month, predominately led by a sharp increase in leisure and hospitality sector (+355 000). The unemployment rate also dropped to 6.2% from 6.3% in January and registers as the lowest rate since March last year. Inflation climbed to 1.7% year-on-year in February from 1.4% the previous month and registers as the highest print since February last year. As expected, the Federal Open Market Committee (FOMC) opted to keep the federal funds target range unchanged at 0%-0.25%. However, notable upward revisions were made to the gross domestic product (GDP) growth (6.5% from 4.2%) and Personal Consumption Expenditures (PCE) inflation (+2.4% from 1.8%) forecasts this year. While the FOMC has acknowledged that inflation is expected to overshoot the committee’s 2% target, the impact is expected to be transitory largely due to base effects and the FOMC has signalled that rate hikes are unlikely in the near term. Another important development from the FOMC was the confirmation that the exemption of commercial bank treasury purchases and deposits at the Federal Reserve from the calculation in the supplementary leverage ratio will officially come to an end on 31 March. The trade deficit widened to $68.2 billion in January from $67 billion in December and registers as the one of the largest deficits on record. Retail sales softened in February, retreating 3% month-on-month after surging 7.6% the previous month. The downturn can in part be attributed to colder-than-expected weather, predominately in Texas. We expected retail purchases to bounce back in the near term, particularly due to further stimulus measures announced by the US Treasury. Similar to the lower-than-anticipated retail sales print, industrial production declined by 2.2% month-on-month in February after rising 1.1% the previous month as adverse weather conditions negatively impacted production.
Data released out of the Euro area in March was somewhat mixed. The IHS Markit Manufacturing PMI jumped to 57.9 index points in February compared to 54.8 in January led by a notable upturn in new order and output growth. Similar to the US, price pressures in the sector were evident. The IHS Markit Services PMI climbed to 45.7 index points in February from 45.4 the previous month, although it remains well below the 50-point neutral mark. However, business optimism improved notably as businesses look toward a more open economy in the future. Inflation remained unchanged at 0.9% year-on-year in February, although core inflation (excluding food, energy, alcohol and tobacco) edged down to 1.1% from 1.4% in January. Retail sales contracted 5.9% month-on-month in January after rising 1.1% the month before largely due to a sharp decline in non-food product purchases. The final GDP print confirmed that the economy fell by 0.7% quarter-on-quarter in quarter four of 2020 after surging 12.5% the previous quarter. Employment increased by 0.3% quarter-on-quarter in quarter four of 2020 after rising 1% in the previous quarter. Wage growth rose by 3.5% year-on-year after a 2.2% increase in the corresponding periods. The European Central Bank opted to keep the refinancing rate unchanged at 0%, as expected. Industrial production climbed 0.8% month-on-month in January after falling 0.1% the previous month. Encouragingly, the ZEW Economic Sentiment Index climbed to 74 points in March from 69.6 the previous month and registers as the highest reading since February 2004.
Data out of the United Kingdom (UK) in March was mixed. The IHS Markit/CIPS UK Manufacturing PMI climbed to a higher 55.1 index points in February from 54.1 in January. New orders climbed higher, although output growth slowed. Overall, business optimism rose the highest level in 77 months amid a stark improvement in expectations of economic conditions in the future. The IHS Markit/CIPS UK Services PMI jumped to 49.5 index points from 39.5 in January. Similar to the manufacturing sector, business optimism rose to the highest level since December 2006. Nationwide housing prices climbed 6.9% year-on-year in February after a 6.4% rise the previous month. Upward price pressure can likely be attributed to the stamp duty holiday. New car registrations fell 35.5% year-on-year in February, marginally better than the 39.5% decline the previous month. The stark downturn can largely be attributed to the closure of showrooms. The trade balance improved in January as the deficit narrowed to £1.6 billion in January from £6.2 billion the previous month, although both exports and imports declined sharply as the UK exited the European Union (EU). Industrial production slipped 1.5% month-on-month in January after rising 0.2% the previous month amid more stringent lockdown restrictions imposed during the month. The Bank of England unanimously voted to keep the bank rate unchanged at 0.1% and left their bond-buying programme unchanged. The Growth from knowledge (Gfk) Consumer Confidence Index improved to -16 in March after a reading of -23 in February as economic prospects continue to improve. Average weekly earnings including bonuses climbed to 4.8% year-on-year in the three months to January compared to a 4.7% rise in the three months to December and registers as the largest increase since March 2008. The unemployment rate fell to 5% in the three months to January from 5.1% in the preceding period. Inflation softened to 0.4% year-on-year in February from 0.7% the previous month amid a sharp decline in clothing prices.
Chinese data has likely peaked in the current economic cycle. The Caixin Composite PMI slowed to 51.7 index points in February after a reading of 52.2 in January as business activity and output growth softened. Exports surged by 60.6% year-on-year in the January-February period while imports rose by a softer 22.2% in the corresponding period. Consumer price inflation declined by 0.2% year-on-year in February after falling 0.3% the month before. Conversely, producer price inflation rose by 1.7% year-on-year in February after increasing 0.3% the previous month as means of production prices bolstered the headline reading. China’s credit impulse re-accelerated by 8% year-on-year in February, after slowing to 7.2% in the previous month. Total vehicle sales surged 365% year-on-year in February. New home prices climbed by 4.3% year-on-year in February from 3.9% the previous month. Industrial production surged 35.1% year-on-year in the January to February period – the sharpest increase on record. Similarly, retail sales soared 33.8% year-on-year in the corresponding period. The People’s Bank of China left the one-year loan prime rate unchanged at 3.85%.
Data out of Japan largely improved. The au Jibun Bank Manufacturing PMI climbed to a higher 52 index points in March from 51.4 the previous month as new order growth accelerated sharply. The au Jibun Bank Services PMI improved to 46.5 index points in March from 45.8 in February, although still firmly in contractionary territory as lockdown restrictions continue to hamper the sector. The unemployment rate softened to 2.9% in January from 3% in the two preceding months. The jobs-to-applicants ratio picked up to 1.1 from 1.05 in December. Consumer confidence picked up to 33.8 index points in February from 29.6 in January as the livelihood, income growth, employment, and willingness to purchase durable goods subcomponents all improved. Bank lending climbed 6.2% year-on-year in February from 6.1% the previous month. Household spending plunged 6.1% year-on-year in January after falling 0.6% the previous month. The final release of GDP growth for quarter four of 2020 came in at 2.8% quarter-on-quarter from an increase of 5.3% in the previous quarter. A sharp improvement in net exports bolstered the continued momentum in economic growth. Industrial production climbed 4.3% month-on-month in January after falling 1% the previous month, although on a yearly basis, output declined 5.2%. The trade balance swung back into a surplus of JPY217.4 billion in February after recording a JPY325.4 billion deficit the previous month. The fifth consecutive deflationary print was registered as headline inflation declined by 0.4% year-on-year in February, although higher when compared to a downturn on 0.6% and 1.2% in the two preceding months. The Bank of Japan opted to leave their policy rate on hold at -0.1%, although did away with their exchange traded fund (ETF) annual buying target of JPY6 trillion. Moreover, long-term rates are now allowed to deviate by 0.25% for their target compared to 0.2% previously.
In South Africa data was mixed. The FNB/BER Consumer Confidence Index edged up to -9 in quarter one of 2021 from -12 in the last three months of 2020. Although the trend is improving, this reading is still below the average of +2 since 1994. in January 2021 manufacturing production shrank 3.4% from a year earlier, worse than market expectations of a 1% fall. Mining production slipped 6.2% in January, compared with market expectations of a 1.9% fall. It was the 11th straight monthly decrease in mining activity. Retail trade fell 3.5% from a year earlier in January, following a downwardly revised 1.2% decrease in the prior month. It was the 10th successive monthly decline in retail activity. The current account surplus fell to R197.8 billion from R294.4 billion in quarter four of 2020 versus the previous period. Still, it was the second largest current account surplus since available records began in 1960. The composite leading business cycle indicator increased 2.1% in January, the most since last October. The economy grew by an annualised 6.3% in quarter four of 2020, easily beating market expectations of a 5% rise, largely due to further easing of lockdown restrictions. Considering the full year of 2020, the GDP shrank 7% – the most since 1946 – as the devastating impact of the Coronavirus (COVID-19), particularly in the second quarter when lockdown restrictions were at their most stringent, weighed heavily on the economy.
The annual inflation rate eased to 2.9% in February from 3.2% in January, below market expectations of 3.1%. It was the lowest rate since last June, amid a slowdown in prices of food and health. Core consumer prices also came in lower than consensus at 2.6%. Producer prices, however, rose 4% in February, up from 3.5% in the prior month and beating market expectations of 3.8%. It was the highest producer inflation since February last year. The South African Reserve Bank (SARB) unanimously voted to keep its benchmark repo rate unchanged at a record low of 3.5% during its March meeting to support the country’s recovery, as widely expected. The SARB also said that risks to its growth and inflation numbers were balanced. Governor Lesetja Kganyago stressed that the pace of the local economic recovery would depend on the pace of vaccination and the appearance of a likely third wave of infections. The central bank raised its 2021 growth forecasts to 3.8% from an earlier 3.6% but maintained its projections of 2.4% and 2.5% for 2022 and 2023, respectively. Its inflation forecast for 2021 was revised higher to 4.3%, from 4%, while the forecast for 2022 was reduced slightly from 4.5% to 4.4%.
The Quarterly Projection Model (QPM) still projects two interest rate hikes of 25 basis points each in quarter two and quarter four of 2021.
Market outlook in a nutshell
- We remain constructive on emerging markets outside of China amid potential high growth rates in corporate earnings.
- We continue to believe that the dollar will depreciate, although rising real yields in the US may result in a temporary pause.
- Global growth is rebounding. A more material recovery is expected this year as precautionary savings unwind, and as economic activity recovers off a low base.
- The roll-out of a vaccine is expected to be a positive boost to equity markets.
- Monetary policy has become more supportive and is expected to remain accommodative in 2021. Central banks will continue to add significant liquidity and balance sheet support to their economies.
- Inflation is expected to rebound in 2021, although will likely struggle to remain near target levels on a sustainable basis for a prolonged period.
- Commodities to broadly benefit from a pickup in global demand.
- Yield curves in many developed economies will likely remain flat or gradually rise, diminishing the capital gain return in bonds as economic growth and inflation accelerate, hence our underweight position at this stage. We do, however, believe that many central banks will continue to intervene in the bond market and supress the pace of yield curve steepening in many of these developed economies.
- Global equities have more investment merit than global bonds.
- Economic growth is expected to recover in 2021 from a low base. The favourable global macroeconomic backdrop should benefit South Africa. The roll-out of vaccines will be a key risk factor. Our base case has a third wave of infections, and we expect the vaccination programme to only be completed by the end of 2022.
- Policymakers and the private sector will continue to muddle through the complexity of implementing meaningful structural reform. Without these reforms overall GDP will remain low by historical standards.
- Fiscal pressures continue to be exacerbated by financial difficulties at state-owned enterprises, particularly Eskom.
- Slightly higher inflation, stronger growth and slightly tighter global conditions should result in a 0.25% repo hike by the second half of 2022.
- We expect the rand to continue enjoying some temporary relief before depreciating over the medium term, within a wide trading range.
- Despite an expected near-term improvement in the jobs market as the economy reopens, unemployment is expected to consistently trend higher and household income to remain weak.
- Successful implementation of growth-enhancing economic and fiscal reforms represents an upside risk to our baseline view.