COVID-19 cases in South Africa seem to be under control, with new cases averaging just above 300 at the end of October. Even though the numbers are still low, it is predicted that the 4th wave could start to hit the country by end of November. i
October was a quiet month locally on the data front with the inflation reading coming to the fore. Inflation remained elevated above the mid-point level of 4.5%, coming in at 5% for September. The main contributors were non-alcoholic beverages, housing and utilities and transport. Transport has been the main driver of inflation, transport prices increased by 10% in September. Petrol prices have risen by 31% in 2021, the global surge in global crude prices which are mainly caused by supply shocks, is expected to be a major driver of inflation ii. There is speculation that elevated levels of inflation may force the South African Reserve Bank to hike rates in the 4th quarter of 2021. We feel that this is unlikely as these are supply side shocks, the SARB toolset is better suited to managing demand pull inflation – something we don’t have in South Africa, unfortunately.
South Africa’s manufacturing production came under pressure in October. The 3 week wage engineering sector strike led by NUMSA combined with Eskom’s rolling blackouts derailed the sector’s road to recovery. ABSA’s Purchasing Managers Index reading tumbled to 53.6 from a revised 54.7 in September.
From our perspective, there are three things that are certain in life: taxes, death and Rand volatility. The rand traded in a range between 14.4 and 15.5 against the US Dollar in the month of October. The rand weakened ahead of the Federal Open Market Committee (FOMC) meeting which is expected to announce US tapering program.
South African equities strongly rebounded from a disastrous September, the S&P South African top 50 gained 5% in October, with 2021 return at a respective 20%. The October rally was led by mainly mining companies, with Anglo Platinum and Anglo American gaining 18% and 8% respectively, this on back of strong commodity prices. With inflation ticking up and a rising rates environment, inflation-linked bonds outperformed sovereign bonds by 1% in October and 5% for the year.
US inflation debate continued to dominate the financial news in October, market sentiment suggest that inflation is not transitory as previously expected. The US personal consumption expenditures index (the Federal Reserves preferred inflation measure) printed 3.6% for September, marking the sixth consecutive reading above the 2% target. This rise in inflation further supports the narrative of the Fed tapering bond purchases before the end of the year and the possibility of rate hikes happening sooner than expected.
US non-farm payrolls reading for September was underwhelming at 194 000, the market expected 500 000. The non-farm payroll number is 5 million below from prepandemic. The world’s biggest economy grew by 2% in the 3rd quarter of 2021, this is the slowest gain since the start of the pandemic. Supply chain bottlenecks have dampened consumer spending, consumer spending makes more than 69% of the US economy.
The latest PMI reading coming from the US suggests that the manufacturing sector is showing signs of a slowdown, PMI was 59.21 for October from 60.17 the previous month. The global supply chain issue and logistics bottlenecks can be attributed to the decline. Even though this is the 3rd consecutive drop and the lowest reading since March, it still means that the US manufacturing is expanding.
Strong US earnings lifted US equities in October, according to a survey conducted by Thomson Reuters, 88% of the companies that reported their Q3 earnings beat analysts’ expectations. Netflix’s Global sensation ‘Squid Game’ helped the world’s biggest streaming services company to lure more subscribers, which boosted the company’s earnings. Elon Musk’s Tesla received a huge order from Hertz, vehicle rental company is expected to order 100 000 vehicles from Tesla. The news pushed the company to be 1 trillion dollar company, making the South African born Musk the richest man to walk on earth in modern times.
The broader US equity index, the S&P 500 posted strong gains in October, the S&P was up more than 7% in October. The blue chip index, the Dow jones Index was up more than 5% for the month.
As winter draws closer in Europe, COVID-19 threatens Europe, Europe accounted for 59% for new COVID-19 cases in the last week of October. The World Health Organization labeled the new wave a “grave of concern“.
UK inflation edged higher in September to 3.1%, slightly lower from the 9 year high 3.2% previously recorded. The Bank of England is set to become the first developed economy central bank to hike rates, inflation is well above the 2% target of the central bank.
Europe’s unemployment rate eased to 7.4% in September, however there are still more than 12 million people without a job. Europe statics office said the Eurozone is recovering from the recession that was caused by the COVID-19 pandemic.
iiiThe Eurozone economy grew by 2.2% in the 3rd quarter of 2021, GDP reading for Germany and Spain was reportedly slower than expected and France and Italy came in better than expected. The UK’s economy grew by 0.4% in August slightly lower than 0.5% than previously expected, the uptick in economic activity can be attributed to easing of lockdown restrictions.
European equities followed the global trend, the regions benchmark, the Euro 350 gained nearly 5% for the month of October. 10 out 11 sectors registered gains with the communications service sector being the only outlier.
European fixed income investors seem to be concerned by the rising inflation. Europe’s Inflation linked bonds have outperformed nominal bonds by a huge margin year to date. Investors are using inflation linkers to hedge against inflation.
ivInflation in Turkey rose to 19.9% in October from 19.6% in September, even though the market was expecting a slightly higher number, in a surprise turn of events, the better than expected print led to a further weakness of the Lira. The Turkish central bank cut rates by 200 basis points last month, the move was seen as a political move as the Bank was previously criticized by President Recep Erdogan.
Power shortage and woes in the property sector, dampened China’s economic growth. The world’s 2nd largest economy grew by 4.9% in the 3rd quarter from a 5.2% that was previously forecasted by the market. Many factories had to stop production in late September as a surge in the price of coal and a shortage of electricity prompted local authorities to abruptly cut off power. The central government has since emphasized it will boost coal supply and ensure the availability of electricity.
Banco Central do Brazil increased interest rate by 150 basis points to 7.5%, as Brazil’s inflation continue to surge. It is expected that the Brazilian Central Bank will increase interest rates again in December.
Emerging Markets equities underperformed their developed counterparts, the S&P Emerging BMI only managed 1% gain in October compared to 5% the S&P developed managed to achieve.
OUTvest in collaboration with Coreshares launched the Global Wealth Builder in October. The underlying Exchange Traded Fund (ETF) is managed by Coreshares Asset Management and will track the performance of more than 9000 companies in 49 markets in both emerging and developed markets.
Since its launch, the Coreshares Total world stock ETF has managed to give investors a return of 6.37% and beating 63% of its peers.
The rebound in global markets helped boast our funds’ performance, our equity funds had good October both absolute terms and relative to peers. The Coreshares OUTmoderate Index Fund was the star performer in October, it managed to outperform 91% of its peers in the month.
Our funds performed extremely well for the year ending October; the Coreshares OUTaggressive Index Fund managed returns over 41%, the Coreshares OUTmoderate Index Fund 35%, the Coreshares OUTstable Index Fund 27% and the Coreshares OUTcautious Index Fund 22%.
For a more detailed look at the month please see downloadable PDF here.