OUTvest Market Commentary - April 2022

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9 May 2022
South Africa experienced a resurgence in COVID-19 infections at the end of April, with the 7-day average increasing to 4491 from an average of 1392 just a month prior.

South African Markets

This has been mainly driven by sub-variants of the Omicron variant. What is pleasing to know is that the resurgence in COVID-19 seems to have a lower mortality rate, therefore, not translating into more deaths. .[i]

The South African (SA) Consumer Price Index (CPI) edged higher in March to 5.9% from 5.7% in February. This was mainly driven by the surge in transport costs, with fuel prices rising by 33% year-on-year.  Even though inflation is still within the Reserve Bank’s target band of 3-6%, it is higher than the mid-point of 4.5% which suggests further action from the central bank.  The South African Reserve Bank (SARB) sounded more hawkish (indicating potentially higher future interest rates) in their previous monetary policy committee (MPC) meeting, as the higher inflation could pave the way for a 50 basis point hike in the near future[ii][iii].

As the SA economy was getting over the devastating COVID-19 pandemic and July Riots, parts of the country were hit by heavy floods, which left 435 dead (and counting) and thousands homeless with KwaZulu-Natal (KZN) being amongst the worst affected area. The floods did not only destroy people’s livelihoods, but also essential but ailing infrastructure. The infrastructure will cost billions of rands to repair, this will also disrupt the already fragile supply chain. Some factories were forced to halt production as the floods ravaged KZN, including the Toyota factory in Prospection[iv][v].

The state power producer – Eskom – added to the country’s problems when loadshedding resumed in April, with the threat of grid collapse. Eskom is the largest systemicrisk that the economy is currently facing. Easing regulation and promoting private generation by municipalities and big corporations could be a short to medium term solution, but we have not seen any implemented plans at the time of writing.

After being one of the best performing emerging market (EM) currencies in the first quarter of 2022, the South African rand was hammered in April, losing all gains for the year. Low growth expectations, rising inflation and central bank responses from developed markets, softening commodity prices and the catastrophic floods experienced in KZN and the Eastern Cape could be attributed to the major sell-off in local currency.[vi]

It was a bloodbath in the local bourse in April, the JSE erased most of the gains for 2022. The financial and resource sectors were the key drivers of weak performance on the JSE. The Resources 10 and the Financial15 index lost 5.4% and 6.4% respectively. Kumba Iron Ore and Anglo American lost 16% and 12% which could be attributed due to the regress of both the platinum and iron price[vii]. A resource share that went against the tide was Thungela Resources which gained a whopping 47% in April and boasts gains over 200% in 2022 as it appears to be benefitting from the coal supply crunch that is due to the Russia-Ukraine conflict and underinvestment in new production. Discovery and FirstRand were amongst the worst performers in the Fin 15 losing 16% and 12% respectively in April.[viii]

The sell-off spilled over into the nominal bond market as the 10-year yield breached the 10% mark. Fears of rising inflation boosted inflation-linked bonds, inflation outperformed nominal bonds by more than 3% in the month[ix].   

 

US Markets

The world’s largest economy unexpectedly contracted by 1.4% in the first quarter of 2022, analysts expected a 1% expansion. This came as a surprise as the United States (US) economy added more than 1.5[x] million jobs in the first quarter of 2022. [xi]

The GDP contraction coupled with the Ukraine-Russia conflict has thrown a spanner in the works of the Federal Reserve’s (Fed) monetary policy stance. The Fed is caught between trying aggressively to fight the multi-decade high inflation, sitting at 8.5%, and avoiding the risk of purging the economy into a deep recession. The Fed is expected to raise rates by 50 basis points in the next meetings. They are also expected to wind down their 9 trillion-dollar balance sheet[xii] – this could slow down economic growth more than expected[xiii].

There should be upward pressure on wages as the US economy recorded record-breaking job openings in March. According to the US Labour Department’s Job Opening and Labour Turnover (JOLT) report, the US economy had 11.5 million job openings. The gap between job openings and available workers is at a record 5.6 million. This can lead to wage inflation which could exacerbate the inflation problem.[xiv]

US equities had an April to forget, the broader US equity Index the S&P 500 lost nearly 9%. This is the heaviest loss since March 2020, at the height of the pandemic. All sectors of the index with the exception of Consumer Staples suffered heavy losses. Information Technology and Communication Services were the hardest hit losing 11% and 15% respectively. Amazon, Alphabet (Google), and Netflix were heavily sold off on the back of disappointing results. Amazon, Alphabet, and Netflix lost 25%, 18%, and 40% respectively in April. The selloff in Tech has led the tech-heavy NASDAQ into a bear market (20% off from highs) and the S&P 500 in correction territory (10% off from highs). [xv]

The Fed’s recent hawkish tone has sent the US yield higher, the 10-year bond yield breached the 3% mark for the first since 2018. [xvi]

The rising bond yield and the Fed’s hawkish tone helped to support the greenback[xvii]. The dollar index has strengthened by 7% year-to-date.[xviii]

 

European Markets  

The Russia-Ukraine conflict entered into the month with no sign of a ceasefire. The conflict has intensified in the eastern and southern parts of Ukraine. Energy prices have remained elevated as Europe depends on Moscow for crude and gas needs.

European inflation rose to 7.4% in March and is expected to reach 7.5% in April. The Eurozone inflation is expected to hit a record high six months in a row. The ECB is caught between a rock and hard place as inflation surges in most of its member states while some member states such as Italy are facing low growth and high debt levels.[xix]

French President Emmanuel Macron was re-elected for another 5 years as France’s first citizen. In a 2017 rematch Macron came up tops against the far-right perceived Marine Le Pan. The news did not move the markets as this was widely expected from polling data.

Even though European equities fared better than other developed markets, the broader European index, the S&P Euro 350 was marginally negative (-0.45%) for April. UK stocks bucked the global trend and posted a marginal gain of 0.3% in April.[xx]

European fixed income also came under pressure as the ECB is expected to raise rates by September, which will bring the end to negative rates by early October. UK inflation-linked bonds were the hardest hit losing 6% in April.[xxi]

 

Emerging Markets

China’s zero COVID-19 policy has led to strict lockdowns in major cities such as Shanghai. It is feared that lockdowns could also be implemented in Beijing. The Chinese economy grew by 4.8% in the first quarter of 2022, up from 4.0% in the last quarter of 2021. Chinese growth is expected to be sluggish as Beijing tries to curb COVID-19 infections.

Turkish authorities continued with their unorthodox monetary policy, the central bank of Turkey kept its benchmark interest rates at 14%, despite inflation reaching 61% in March. The Turkish president has claimed that lower interest will combat the high inflation number – a policy at odds with standard practice. This economic mumbo jumbo has contributed to the Turkish Lira woes, as the currency is the worst-performing emerging markets (EM) currency.[xxii]

EM equities continued their downward trajectory into April, the broader emerging market index lost more than 5% and 13% year-to-date. The Brazilian and Polish indices were the biggest drag on the main index losing 13% and 17% respectively[xxiii].

 

Funds on the OUTvest Platform

Our investment philosophy is not to try to find the needle in the haystack, we buy the whole haystack. This is the reason the funds in the OUTvest platform cannot be spared if there is a broad sell-off in financial markets. April was a bad month for both local and global markets, there was a broad selloff in equities and fixed income. It is for this reason our funds struggled in April.

As we all know financial markets do not go up in a straight line, and short-term noise should be taken with a pinch of salt.

All our multi-asset funds were negative in April. However we still strongly believe our strategic asset allocation is well-positioned in the long run.

Due to regulation changes (Reg 28) and structural changes in the Preference shares market, the OUTvest Index Committee has decided to review the strategic asset allocation of the Coreshares OUT portfolios. This may cause an update in the strategic asset allocation during the second half of 2022, if warranted.

 

 

OUTvest is an authorised FSP. All investments are exposed to risk, not guaranteed and dependent on the performance of the underlying assets. Past performance is not indicative of future performance. Individual investor performance may differ as a result of fees, the actual investment date, the date of reinvestment and dividend withholding tax. Both Exchange Traded Fund(s) (ETF) and unit trusts are collective investment schemes, however, these products are priced and traded differently. A unit trust is priced once a day whereas an ETF is trading continuously throughout the day during JSE trading hours. Benchmark: FTSE Global All Cap Index. Collective investment schemes are generally medium to long-term investments. Ts and Cs apply

 

 


Sources

[i] https://www.google.com/search?q=south+african+covid+cases&rlz=1C1GCEU_enZA928ZA928&oq=south+african+ovid+&aqs=chrome.1.69i57j0i13l6j0i13i457j0i13l2.14737j0j15&sourceid=chrome&ie=UTF-8

[ii] https://www.statssa.gov.za/?p=15341

[iii] https://www.resbank.co.za/content/dam/sarb/publications/statements/monetary-policy-statements/2022/statement-of-the-monetary-policy-committee-march/Monetary%20Policy%20Committee%20Statement%20March%202022%20.pdf

[iv] https://www.news24.com/news24/southafrica/news/flood-costs-revised-from-r950-billion-to-r17-billion-but-kzn-government-says-was-honest-error-20220425

[v] https://www.iol.co.za/news/south-africa/kwazulu-natal/death-toll-from-kzn-floods-increases-to-448-scores-still-missing-aad54eac-c6bc-4e80-b890-9b0225fc02c1/

[vi] OUTvest , Infront Professional Services . End April  2022

[vii] OUTvest, Infront Professional Services. End April 2022

[viii] OUTvest ,Infront Professional Services .End April 2022

[ix] S&P Indices /https://protect-za.mimecast.com/s/Y_g4CY6YkJhOWk1wcj_ZD-?domain=spglobal.com /

[x] https://tradingeconomics.com/united-states/non-farm-payrolls

[xi] https://www.cnbc.com/2022/04/28/us-q1-gdp-growth.html

[xii] https://finance.yahoo.com/news/quantitative-tightening-federal-reserve-9-trillion-balance-sheet-113743366.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAMafizBtCnjpg2qjQeqskRaBq-0d-iVjDTsSYz4qzBc8utMAD4AV6KaKmP0lckm9cfyDE82N97Fru4tPvsHnVA_rbdymMF09s2JnTd2loe2zGW5qsgO7o3FVZrNEQh40scFIs22aJldGGO0ATDzWZ78JldMXkS3hYnEcG0jBtd-u

[xiii] https://www.ft.com/content/848a70fe-557b-40a0-949b-70acc6ac6905 

[xiv] https://tradingeconomics.com/united-states/job-offers

[xv] dashboard-us.pdf (spglobal.com)

[xvi] https://www.wsj.com/articles/treasury-yields-rise-further-after-jobs-report-11651845484#:~:text=The%20yield%20on%20the%20benchmark,in%20more%20than%20a%20decade.

[xvii] https://www.marketwatch.com/investing/index/dxy

[xviii] https://www.cnbc.com/2022/05/02/gold-markets-us-bond-yields-federal-reserve.html

[xix] https://www.dw.com/en/eurozone-sees-record-inflation-in-march/a-61532605

[xx] dashboard-europe.pdf (spglobal.com)

[xxi] https://www.reuters.com/world/europe/ecb-has-room-2-3-rate-hikes-this-year-says-kazaks-2022-04-26/

[xxii] https://www.theguardian.com/business/2022/apr/16/turkeys-war-with-inflation-prices-change-daily-and-everyone-is-scared#:~:text=Turkey%20is%20weathering%20an%20unprecedented,rocketing%20inflation%2C%20officially%2061.14%25.

[xxiii]S&P Indices /https://protect-za.mimecast.com/s/Y_g4CY6YkJhOWk1wcj_ZD-?domain=spglobal.com

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