OUTvest Market Commentary - March 2022

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13 April 2022
The first quarter of 2022 was mostly dominated by the Ukraine-Russia conflict and central bankers, the conflict elevated inflation expectations as Moscow is the 3rd world’s largest crude supplier and Ukraine accounts for more than 11% of the world’s total wheat production. The conflict threw a spanner in the wheel for many central bankers around the world as inflation expectations accelerated quicker than previously expected.

South African Markets 

The first of quarter of 2022 was mostly dominated by the Ukraine-Russia conflict and central bankers, the conflict elevated inflation expectations as Moscow is the 3rd world’s largest crude supplier and Ukraine accounts for more than 11% of the world’s total wheat production. The conflict threw a spanner in the wheel for many central bankers around the world as inflation expectations accelerated quicker than previously expected. This has led the South African Reserve Bank to increase interest rates by another 25 basis points. Although this was in line with market expectations, what was surprising is 2 out of the 5 Monetary Policy Committee (MPC) members opted for 50 basis point increase, this signals that South Africa’s bank of last resort is starting to sound more hawkish (higher interest rates) than previously guided . 

South Africa’s unemployment headache continued into the 4th quarter of 2021 as South Africa’s official unemployment stood at 35.3% with the expended definition at 46.2%, this is the highest level since the quarterly labour force survey began. This means 7.9 million South Africans are without a job however the more worrisome number is the number of not economic active people in South Africa sitting at 14 million people. The high level of unemployment is a recipe for social instability, the July riots experienced in 2021 could be a norm going forward if policy makers cannot resolve the crisis .

On a positive note, Moody’s Investor Services upgraded South Africa’s credit rating from negative to stable. The high commodity prices helped the South African government effort to stabilize debt and reduce the budget deficit. “Faster implementation of economic and State-owned Companies reforms, accompanied by fiscal consolidation to provide a stable foundation for growth, will ease investor concerns, and support a faster recovery and higher levels of economic growth,” the rating agency stated.

Despite the chaos and wild swings we experienced in the first quarter of 2022, the local equity bourse closed 2.4% higher for the quarter, even though March was a lacklustre. The JSE went against the global trend as major equity indices were negative in the first quarter of 2022, miners and financials lifted Africa’s biggest exchange higher for the quarter. The Ukraine-Russian conflict has led the world into an energy crunch, this has benefited Thungela and Exxaro who gained 117% and 45% respectively for the quarter. The big banks were also winners in the first quarter of 2022, Nedbank, Standard Bank, FirstRand and Absa gained 33%, 31%, 27% and 24% respectively for the quarter. Former JSE star performers Naspers and Prosus were among the worst performers in the quarter and Beijing’s heavy hand on Tech companies combined with strict COVID-19 restrictions in China can be attributed to the tech giants’ nose dive. 

 

US Markets

The Federal Reserve changed its tone towards inflation being transitory and sounded more hawkish in early 2022, this sent bond yields higher. The Russia-Ukraine conflict has resulted in a commodity supply shock, this has sent energy prices and inflation expectations higher. Central bankers are in a dilemma of taming inflation or boosting growth.

In a surprise turn of events, US 10-year and 2-year yield inverted (2-year >10-year), an inverted yield curve is seen to predict a recession in the coming months. 7 out 10 times when the yield curve inverted, recession followed within a year and with a 98% chance in the following years.   Having said that, many market participants believe the curve needs to stay inverted for a substantial amount of time before it gives a valid signal.

Even though there is negative sentiment in the market, US job numbers are still robust. The world’s largest economy added 678 000 jobs in February which led the unemployment to drop to 3.8%.

The Federal Reserve increased interest rates for the 1st time since 2018, the 25 basis point increase is the first of 7 that are anticipated for 2022. This comes on the back of the hot inflation number of 7.9%, the highest number in nearly 40 years.  

The first quarter of 2022 was characterized by wild swings, a steep decline in January and February was subsequently followed by a partial rebound in March. Strong company earnings coupled with buybacks boosted the S&P 500 in March after dismal January and February. Even though US equities had a good March, they failed to recoup losses experienced in the first 2 months of the year, the blue chip index is still down 4.56% for the year.

The 10-year U.S. Treasury Bond closed at 2.34% (after reaching 2.55%), up from last month's 1.85% (1.51% at year-end 2021, 0.92% at year-end 2020).

 

European Markets

As Europe is highly dependent on Moscow for its oil and gas needs, the Russia-Ukraine situation makes the region very vulnerable. A prolonged period of high energy prices can have a negative impact on growth in the region.

Despite the Eurozone inflation reaching an all-time high, the European Central Bank (ECB), is not expected to raise rates until the 4th quarter of 2022.  President Christine Lagarde noted that the bank expects to gradually conclude its asset purchases in Q3 of 2022.

The United Kingdom labour market is still showing signs of tightening with strong jobs growth in February. The unemployment rate fell to 3.9% and wage growth was faster than expected.

The flash PMI (manufacturing strength) business survey was also better than expected with the composite component showing a modest decline to 59.7 (50>expansion), which indicates that the economy is currently still growing at a good pace despite headwinds from higher energy prices. However, consumer confidence fell sharply.

European Equity markets were literally flat (0%) for the month of March, it was a quarter worth forgetting for equities, the European broader index was down 8.5% for the quarter. 

European fixed income also had a quarter to forget, European government bonds fell more than 5% in the first quarter of 2022.

 

Emerging Markets

The economic and financial sanctions imposed on Russia by western nations, including removing some Russian banks from the SWIFT interbank payment system and imposing restrictions on the Central Bank of Russia’s (CBR). This led the Central Bank of Russia to increase rates to 20% to curb outflows. Despite all the effort, the Russian Ruble collapsed and the stock exchange was closed for two weeks .

Turkey’s official inflation rate hit its highest level in 20 years as soaring energy and food prices compound the economic challenges confronting President Recep Tayyip Erdoga, the unorthodox monetary policy has pushed the Turkish inflation rate to reach 61%.

The outbreak of the Omicron variant in major cities in China has led to lockdowns in cities such as Shanghai and Shenzhen. The lockdowns will exacerbate the global supply chains constraints as manufacturing plants shut down. More convincing economic stimulus measures announced by Chinese authorities during the National People’s Congress, a material improvement in credit growth and the confirmation of a 5.5% growth target for 2022 brought back some confidence to markets, supporting a rebound in onshore and offshore equity indices at the end of March.

Emerging Markets equities continued their downwards trajectory, the Chinese market continue to drag down the broader index. The Chinese equity market was down by 13% in the first quarter of 2022 and 8% for the month of March. The Brazilian market was the star performer among its emerging peers, supported by strong commodity prices. The Brazilian market equity market was up more than 14% in March and 36% for the quarter.

 

Funds on the OUTvest Platform

The funds on the OUTvest platform are not immune to global markets dynamics, last year – the OUTvest Investment committee went through a process that amended the asset allocation for the OUTvest Funds to be tilted more towards global markets. Even though global markets especially Emerging Markets have underperformed in the first quarter of 2022, global markets still have superior growth prospects, especially over the longer term. 

The geopolitical events filtered through into the performance of the funds in our platform, all our multi-asset funds posted negative returns in the 1st quarter of 2022. The fall of global markets and Rand strength can be attributed to the negative return.  As we have more offshore exposure than our peers, the turn global markets have led our funds to underperform when compared to our peers. 

What we encourage is long-term investing and short-term performance should be taken with a pinch of salt, as markets do not go up in a straight line and volatility is part of the market dynamics.  

 

 

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

https://www.dw.com/en/ukraine-war-increases-global-food-insecurity/a-61206423

https://www.moneyweb.co.za/news/south-africa/sarb-to-hike-repo-rate-to-4-25-on-march-24-poll/

https://businesstech.co.za/news/business/572250/jobs-bloodbath-hits-south-africa-as-unemployment-climbs/

https://www.cnbc.com/2022/03/31/2-year-treasury-yield-tops-10-year-rate-a-yield-curve-inversion-that-could-signal-a-recession.html.

https://am.jpmorgan.com/gb/en/asset-management/per/insights/market-insights/market-updates/monthly-market-eview/#:~:text=The%20Market%20Insights%20program%20provides,data%20and%20changing%20market%20conditions

 

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