Market Overview

22 April 2022

Global capital markets have been under pressure since the start of the year. First, fears over rising inflation and the prospect of tighter monetary policy stoked investor trepidation. Then, at the end of February, Russia invaded Ukraine, stoking investors’ fears.

Global equities remained under pressure in March. Emerging markets fared worse than developed markets although most of the pressure in this complex was felt in March. Russian equities came under pressure as sanctions dimmed company prospects in the region and certain index providers moved to classify the market as “uninvestable”. China equities were further sold off as regulatory fears, geopolitical issues and growth fears amid a continued hard-line approach to Covid-19 kept investors at bay. Developed market bond yields increased as looming rate hikes and geopolitical risk crept into sovereign rates.

In rand terms, the JSE All Share Index ended March slightly lower, but the index was up in US dollar terms. Similarly, the All Bond Index ended the month flat with dollar returns positive and well ahead of rand returns. The rand again performed well against the US dollar in March.

South Africa’s relative attractiveness from an investment perspective, along with continued strong terms of trade and fiscal support due to high commodity prices, helped the local currency.

ECONOMIC DATA REVIEW

US data was mixed with news flow dominated by the Fed’s first rate hike in three years. Retail sales increased 17.6% year-on-year in February, well ahead of forecasts. The trade deficit widened to $89.7 billion in January, from an upwardly revised
$82 billion in the previous month and above the estimated gap of $87.1 billion. The unemployment rate edged down to 3.8% in February – a new pandemic low. This was below market expectations of 3.9%. Annual inflation accelerated to 7.9%, amid elevated energy and commodity prices. Policymakers raised the target for the Federal Funds rate to between 0.25% and 0.5% during the Fed’s March meeting - the first increase in three years - and signaled further rate hikes ahead. Chair Jerome Powell also reiterated that the Fed would take all necessary action, including rate hikes in iterations of more than 25 basis points, to combat rising inflationary pressures.

On a preliminary basis, the S&P Global Composite Purchasing Managers’ Index (PMI) for the US rose to 58.5 in March from a final reading of 55.9 a month before. This was well above expectations, as demand and supply conditions continued to improve.

Eurozone data was still mixed but high inflation and a deterioration in confidence dominated. The seasonally adjusted unemployment rate in the euro area fell to a new record low of 6.8% in January, below estimates. The eurozone posted a trade deficit of €27.2 billion in January 2022, well ahead of expectations. Imports climbed 44.3% year-on-year, driven by a surge in energy purchases, while exports rose at a slower 18.9% year-on-year. Annual inflation edged to a fresh record high of 5.9% in February 2022, almost three times above the European Central Bank’s (ECB) target. During its March meeting, the ECB unexpectedly sped up its asset purchases schedule for the coming months. Regarding the war in Ukraine, ECB President Christine Lagarde emphasised the material impact on economic activity and inflation through higher energy and commodity prices, as well as weaker sentiment.

Initial estimates showed the S&P Global Eurozone Composite PMI fell to 54.5 this month as consumer confidence deteriorated. This was, however, still ahead of the estimated 53.9.

UK data was also mixed – confidence tempered but remained strong in March. Britain’s gross domestic product grew 10% year-on-year in January, above expectations of 9.3%. Retail sales volumes increased 7% year-on-year, below expectations. The trade deficit widened to 16.2 billion in January, from 2.3 billion in the previous month, as exports were dragged by a decline in sales to European Union nations. The unemployment rate declined to 3.9% in the three months to January 2022 – the lowest in over two years - as the labour market continued its recovery. Annual inflation increased slightly above estimates to 6.2% in February. During its March 2022 meeting, the Bank of England raised its benchmark interest rate by 25 basis points to 0.75%, as widely expected. Recent events, such as the Russian invasion of Ukraine, are likely to heighten both the peak in inflation and the adverse impact on economic activity by further pressuring household income. Inflation is expected to increase further in quarter two of 2022, to around 8%.

According to preliminary reports, the S&P Global/CIPS UK Composite PMI eased to 59.7 in March but was still well ahead of the forecasted 57.8 as growth in private sector activity remained strong.

China data pointed to an unsteady recovery. Retail sales rose 6.7% year-on-year, considerably beating estimates of 3%. China’s trade surplus widened sharply to
$116 billion, from $97 billion in the same period a year before. This was ahead of the forecasted $99.5 billion, as exports extended their double-digit growth, rising 16.3% year-on-year, while imports rose at a softer 15.5%. The surveyed urban unemployment rate was up to 5.5% in February – marking the highest jobless rate in over a year. As anticipated, the annual inflation rate stood at 0.9% as food costs remained subdued.

China’s composite PMI remained unchanged at 50.1 for February 2022, slightly below expectations of 50.8.

Japan’s central bank maintained its dovish stance. Retail sales rose 1.6% year-on-year in January, ahead of the estimated of 1.5%, driven mainly by sales in fuel, general merchandise and medicine and toiletries. Japan posted a trade deficit of
668 billion compared to forecasts of 12 billion. This marked the seventh consecutive month of a trade shortfall as imports jumped 34% year-on-year. The unemployment rate increased ahead of expectations to 2.8% in January 2022, reflecting the impact of the Omicron variant on the labour market. As widely expected, the Bank of Japan left its key shortterm interest rate unchanged at -0.1% and maintained its target for the 10-year Japanese government bond yield at ~0%. Despite noting an uptick in the economy, policymakers warned of fresh risks from the Russia-Ukraine conflict, including further pressure on raw material costs, but reiterated that the bank will not hesitate to take extra easing measures if necessary.

Flash estimates showed that the Jibun Bank Composite PMI reading for Japan increased to 49.3 in March 2022, from a final 45.8 in the previous month. This was well ahead of expectations.

In South Africa, data remained strong but has not yet fully factored in the impact of the Russia-Ukraine conflict. GDP growth advanced by 1.2% quarter-on-quarter in the three months to December 2021, following an upwardly revised 1.7% contraction in the previous period. Considering the full year of 2021, the economy expanded by 4.9%, the most in 14 years, recovering from a 6.4% decline in 2020.

Retail trade surged by 7.7% year-on-year in January, well above market estimates of a 4.9% gain. It was the fifth straight month of growth in retail activity, and at the fastest pace since last June. Private sector credit grew by 3.12% year-on-year in January, after a 2.58% gain a month earlier. This marked the seventh consecutive monthly increase, and the strongest rise since January 2021.The value of recorded building plans passed climbed 44.5% from a year earlier in January. It was the strongest growth since last July, as building plans increased for all segments.

The current account surplus narrowed to R120 billion in quarter four of 2021, from a downwardly revised R216 billion in quarter three of 2021. As a ratio of GDP, the current account surplus narrowed to 1.9% in quarter four of 2021. The trade surplus narrowed to R3.55 billion in January from R29.02 billion in December. Exports fell 16.1% while imports edged up 0.3%.

Mining production rose 0.1% year-on-year in January, after a downwardly revised 1% fall in the previous month. Manufacturing production advanced 2.9% year-on-year in January, following three consecutive months of decline. It was the strongest increase in factory activity since last June.

Consumer price inflation was unchanged at 5.7% in February, slightly below market expectations of 5.8%. Core inflation, which excludes prices of food and energy, printed at 3.5%, also unchanged from January, but below estimates of 3.7%. The South African Reserve Bank raised its benchmark repo rate by 0.25% to 4.25% at its March meeting, as widely expected. This was the third consecutive hike due to increased inflation risks stemming from the conflict in Ukraine. The SARB’s headline CPI forecast has been revised sharply higher to 5.8% in 2022 (vs 4.9% in January), primarily due to higher food and fuel prices. Three members voted for a 0.25% hike, while two members favoured a 0.5% increase.


The FNB/BER business confidence index rose to 46 in quarter one of 2022 from 43 in the previous period, the highest level since quarter two of 2021, and pointed to an improvement in sentiment among manufacturers.

This was helped by strong domestic sales and exports. The FNB/BER consumer confidence index fell to -13 in quarter one of 2022 from -9 in the previous period, mainly on concerns over the global impact of Russia’s invasion of Ukraine on growth and inflation. The IHS Markit PMI was at a three-month high of 50.9 in February, unchanged from January. The composite leading business cycle indicator increased by 1.0% from a month earlier in January, rebounding from a downwardly revised 0.3% fall in December.

OUTLOOK

Local

• Real economic activity is expected to soften from the elevated levels seen in 2021. Slower economic growth in Europe and pressure on domestic household consumption from higher inflation will contribute to this trend.
• 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.
• The terms of trade boost seen in 2021 and a few other factors have improved the fiscal outlook over the short term, however, the longer-term outlook remains challenging. Fiscal pressures continue to be exacerbated by financial difficulties at SOEs, particularly Eskom.
• Domestic inflation is expected to remain elevated through the first half of this year. Most of this inflation pressure is attributed to food and oil prices, both of which are expected to peak towards the middle of this year.
• Short-term interest rates are expected to lift to 5.25% by the end of the year and 5.75% by the end of 2023. If inflation expectations lift more than expected, a 50 basis points hike in May cannot be ruled out.
• 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 will remain weak.
• Successful implementation of growth-enhancing economic and fiscal reforms represents an upside risk to our baseline view.

Global

• We remain cautious on the returns for global equity markets as supportive monetary and fiscal policy that helped propel equities last year is indeed fading.
• Data out of China continues to improve, although we remain relatively cautious as high yield credit spreads are elevated. While monetary policy is becoming accommodative, more easing needs to be initiated to stimulate credit demand. Our expectation is for improved credit conditions, which, combined with low market multiples, could see us become more constructive this year.
• Developed market consumption expenditure is expected to be more muted amid lower savings rates, subsiding government transfer payments, and as real disposable income is eroded by inflationary pressures.
• The relative hawkishness of the US Federal Reserve compared to other major central banks has helped increase the relative attractiveness of the dollar. This will resultantly lead to less supportive liquidity dynamics in 2022.
• While price pressures remain sticky, particularly against the backdrop of elevated tensions between Russia and Ukraine, we continue to believe that the inflation profile will subside in the second half of the year.
• We continue to believe inflationary pressures will dissipate in second half of 2022 as we assume supply chain bottlenecks will likely unwind as trading conditions normalise. In addition, shelter price base effects from 2021 will likely lead to a disinflationary backdrop, particularly in second half of 2022, as a more meaningful acceleration seems unlikely due to rising affordability concerns likely limiting house and rental price appreciation.