OUTvest Market Commentary - June 2022

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4 July 2022
The first half of 2022 ended with the South African economy facing severe power cuts. The state power utility - Eskom - introduce stage 6 load-shedding for the first time since 2019.

South African Markets

The Eskom wage dispute, coupled with the higher energy demand due to dropping temperatures across South Africa has led the troubled Energy  company to experience a major breakdown in its power stations. South Africa is yet to resolve the 14-year old economic crisis which may be attributed to various political reasons.   The state utility is arguably the largest growth constraint South Africa is currently facing. [i]

The South Africa Consumer Price Index rose to 6.5% in May, its highest level in 5 years. This was an increase from 5.9% in April and March Inflation has breached the upper bound of the South African Reserve Bank’s (SARB) target. The last time that inflation breached this level the repo rate was 7%, and this suggests the SARB will be likely forced to hike rates aggressively in the next coming meetings. The higher inflation print is mainly driven by energy prices as petrol prices have increased by 27% since last year May. Another major contributing factor to high print- is the cooking oil prices. The annual rate was 27% in May, representing the 17th month that the rate has been above 10% (since December 2020). Prices jumped by 10,1% between April and May, representing the first time since 1997 that the monthly rate was above 10%.[ii]

The ABSA Purchasers Managers’ Index (PMI) closed the quarter in positive territory, despite the challenges the manufacturing sector currently facing- from rolling blackouts to labor disputes and the KZN floods which disrupted the supply chain. Despite dropping to 53.8 in June from 54.8 the previous month, the sector is above the 50 point which signals growth in the sector.[iii]

The South African economy grew faster than expected in the first quarter of 2022, data from Stats SA suggest that the economy is back at pre-covid levels. Africa’s most industrialised economy grew by 1.9% in the first quarter in quarter-on-quarter seasonally adjusted terms and by 3.0% year-on-year unadjusted in the first three months of the year. Strong manufacturing and trade data boosted the already fragile economy. Despite the elevated commodity prices, the mining sector was a drag on the economy. There was a sharp decline in mining production, especially in platinum group metals (PGM), gold, and iron ore. Further to this, the dysfunctional railway network has resulted in major backlogs as mining companies cannot get products to market[iv].

South African financial markets had a June and second quarter to forget as the JSE had the worst month since March 2020, while we were at the height of the pandemic. The JSE All Share Index closed more the 8% in the red in June and nearly 12% for the quarter. The local market followed the global trend as investors were spooked by the higher-than-expected inflation number which led the Fed to subsequently raise rates by 75 basis points. It was red across the board in the second quarter of 2022, with the resources sector losing more than 20%. One of the biggest drags in the resource sector was Anglo American which lost 24% in June alone and nearly 30% for the quarter. There were a few bright sparks in JSE in June: one of it being Mediclinic. The private hospital group received an unsolicited buyout from a consortium led by Remgro, the diversified Industrial company, together with Mediterranean Shipping Company, which offered to purchase Mediclinic for R66 billion. The Mediclinic Board subsequently rejected and noted that the offer is 27% below the company’s fair value.The hospital group was up close to 20% for the month of June. Naspers and Prosus management announced that they will be implementing a strategy that will try  to create shareholder value, which will see the tech giant selling some of its stake in its crown jewel –Tencent - and using the cash to buy some of its shares. The strategy is aimed to reduce the widening discount between Tencent and Prosus and Prosus and Naspers.

Inflation-linked outperformed nominal bonds even though both had a negative June, this comes after inflation has breached the South African Reserve Bank target.


US Markets

US consumer prices have risen to their highest level since 1981, to 8.1% in May 2022. When excluding the more volatile prices such as energy and food prices, otherwise known as core inflation, the print came at 6%. Energy prices broadly rose 3.9% from a month ago, bringing the annual gain to 34.6%. Within the category, fuel oil posted a 16.9% monthly gain, pushing the 12-month surge to 106.7%. The Fed has acknowledged they got their inflation prediction wrong as inflation seems to be stickier than they thought previously. [v]

The Federal Reserve hiked rates by 75 basis points, this is the high level since 1994, as inflation is more ( than 6% higher than its target of 2%. The Fed is expected to continue its aggressive stance as inflation is at unsustainable levels. The Fed is expected to raise rates between 50 or 75 basis points in its July policy. The market expects the Fed to continue its tight monetary policy stance into the middle of 2023. The Fed revised its GDP growth forecast for 2022, from 1.7% to 2.8%. [vi]

The US economy is expected to add 250 000 jobs in June, from 390 000 in May. Even though the US non-farm payrolls are decreasing they are still above the pre-pandemic average of 150 000 - 200 000 jobs a month. Even though some economic experts believe the US economy might be in recession, surprisingly the job market is still in full employment. This suggests an abnormal turn of events, where the economy is in recession but, the same economy still produces jobs[vii].

U.S. equities posted their worst first-half performance since 1970, as inflation concerns, Fed rate hikes, and slowing economic growth weighed on markets. The broad US market index – the S&P 500 - is officially in a bear market (20% lower from highs) as it has already lost 20% in 2022 alone. The once high-flying Information Technology sector was one of the hardest-hit sectors in the first half of 2022 - Information Technology shares lost nearly 27% in the first-half of 2022, while the tech-heavy NASDAQ lost nearly 30%. Even though energy shares lost almost 17% in June, the sector is still up 31% for the year. [viii]

The US 2year and 10year bond yield briefly inverted (a phenomenon whereby the rate on the 2 year is greater than the 10 year) for the first time since April, as market participants fear recession in the short term. The higher than expected inflation and coupled with the subsequent 75 basis hike by the Fed, has pushed rates higher as the 10y reached 3.39% for the first since March 2020.[ix]


European Markets

Christine Lagarde (European Central Bank Governor) signalled that European Central Bank (ECB) will start its rate hiking cycle in July, as the 19 member block is currently facing its highest inflation ever recorded. Inflation is expected to 8.6% in June. European central bankers are still deliberating whether to hike by 50 or 25 basis, trying to find a balance between fighting inflation and stimulating the economy as the Ukraine-Russia enters its 5th month.  [x]

The Russia-Ukraine conflict has exacerbated Europe’s energy crises as Moscow plans to retaliate against western nations’ sanctions, by cutting gas supplies to some European countries. To curb foreign currency outflow and stabilize the currency, the kremlin introduced a policy where it required Russian Rubels for gas payments.

The United Kingdom recorded the lowest unemployment rate in nearly half a century in the first quarter of 2022, for the first time on record there were 1.3 million job vacancies. The UK may experience a labour squeeze which could ultimately lead to higher wage inflation.

European equities followed the global trend as fears of high inflation, economic recession worries and the Ukraine-Russia war rattled equity markets in the first half of 2022. The broad equity index, the S&P Europe 350 fell more than 13% in the 1st half of 2022. Information Technology shares have taken a tumble, as valuation models are revised as rates are higher.  [xi]


Emerging Markets

The Chinese government has started a process to phase out its stringent zero COVID-19 policy. Major cities such Shanghai started to ease lockdown restrictions, after data showed that not many severe cases were recorded. As a study done by Chinese authorities showed, out of 33,000 people who were hospitalized only 22 had severe illnesses, all were over 60 and had a pre-existing medical condition.[xii]

The Central Bank of Brazil increased rates for the 11th consecutive time, in their June meeting, Banco Central do Brasil (BCB) increased the Selic rate by 50 basis to 13.25%. The central bank slowed on the rate hike from 100 basis points in the previous month. This seems Brazil is nearing the top of the rate hiking cycle, suggesting inflation is under control.


The Turkish Lira was in free fall against major currencies, as Turkish President Recep Tayyip Erdogan vowed to cut rates, despite inflation being at a multi-decade high (73%). The President came up with an economic model, which he insists will benefit from the weak Lira as this will boost exports, reduce the trade deficit and attract investments.[xiii]

Emerging markets faced a challenging month, with the S&P Emerging BMI decreasing by 5.2% in June and 16% for the first half, the biggest drop in the history of the index. The Brazilian market was one of the hardest-hit markets, as commodity prices dropped sharply. The Brazilian market lost nearly 20% for the month of June alone. The Chinese market was one the few bright spots, as loosening Covid-19 restrictions and eased market conditions helped boost market confidence. The broader Emerging Market Index fell by 15% in the second quarter of 2022.[xiv]


Note to OUTvest Clients

Our main objectives at OUTvest are capital preservation and seeking capital growth. We have designed portfolios which we feel have the best mix of different asset classes and geographic exposure. This, as a result provides portfolios with diversity. Assets globally have sold-off in 2022 and our funds have not been immune to this. However, we always advise clients to avoid short-term noise and not allow emotions to get the better of their long-term wealth creation. We still believe in staying fully invested and keeping to your investment strategy and following the advice from your financial advisor. Selling at the bottom might cause destruction to your long-term wealth creation. Trying to pick a bottom or timing the market could be detrimental to long-term financial goals.

JP Morgan did a study, which looked at data from January 2002 to January 2022. The study found if an investor stayed fully invested in the market, their average return will be 9.40%. If the investor missed the 5 best days in the period, their average return will be 5.21%. If the investor missed 30 days of the best days, their average return will be 0.32%.[xv]





OUTvest is an authorised FSP.  All investments are exposed to risk, not guaranteed and dependent on the performance of the underlying assets.  The above does not constitute financial advice.  Please ensure to contact OUTvest or your financial advisor for advise on your personal financial goals.  Collective investment schemes are generally medium to long-term investments








[i] https://businesstech.co.za/news/energy/602034/eskom-updates-stage-6-load-shedding-here-is-the-new-schedule/
[ii] https://businesstech.co.za/news/energy/602034/eskom-updates-stage-6-load-shedding-here-is-the-new-schedule/
[iii] https://businesstech.co.za/news/energy/602034/eskom-updates-stage-6-load-shedding-here-is-the-new-schedule/
[iv] https://www.statssa.gov.za/?p=15440#:~:text=South%20African%20gross%20domestic%20product,consecutive%20quarter%20of%20upward%20growth.&text=The%20size%20of%20the%20economy,before%20the%20COVID%2D19%20pandemic.
[v] https://www.aljazeera.com/economy/2022/6/10/us-inflation-hit-a-new-40-year-high-last-month-of-8-6
[vi] https://www.cnbc.com/2022/06/15/fed-hikes-its-benchmark-interest-rate-by-three-quarters-of-a-point-the-biggest-increase-since-1994.html
[vii] https://www.cnbc.com/2022/07/08/jobs-report-june-2022-.html
[viii] dashboard-us-sector-2022-06.pdf (spdji.com)
[ix] Mimecast TTP Web Portal
[x] https://www.dailyfx.com/forex/fundamental/central_bank_watch/2022/06/23/central-bank-watch-boe-ecb-interest-rate-expectations-update-june-23.html
[xi] https://protect-za.mimecast.com/s/yb1WCzm428cgwMx1cK_JfK?domain=spglobal.com
[xii] https://www.dw.com/en/what-is-chinas-zero-covid-policy/a-61736418
[xiii] https://www.reuters.com/markets/us/brazil-central-bank-raises-rates-by-50-bps-signals-another-hike-2022-06-15/#:~:text=The%20bank's%20rate%2Dsetting%20committee,50%2Dbasis%2Dpoint%20increase.
[xiv] https://protect-za.mimecast.com/s/IDmDCElXNgc903g7ux2W-t?domain=spglobal.com
[xv] https://www.jpmorgan.com/wealth-management/wealth-partners/insights/the-case-for-always-staying-invested
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