OUTvest Market Commentary - September 2022

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25 October 2022
The South African Reserve Bank (SARB) increased the Repo by 75 basis points for the 2nd consecutive time in September.

South African Markets

The South African Reserve Bank (SARB) increased the Repo by 75 basis points for the 2nd consecutive time in September. In its statement, the SARB sounded more hawkish – indicating that rates may be raised further - with two out of the five MPC members gunning for a 100 basis point increase in rates. The Bank of last resort is in a drive to be ahead of the inflation curve.

The rand has weakened by more than 13% over the quarter. Local dynamics, such as the state energy company ‘’eishkom’’ introducing stage 6 of blackouts in mid-September, played a role in installing uncertainty in the market. However, a lot of the weakness stems from dollar (USD) strength. The greenback has strengthened against almost all currencies as fears of a global recession loom.

Even though South African inflation is still relatively high, it softened from the 13-year high of 7.9% to 7.6% in August. This could be early signs of an inflation number that has passed its peak, as major inflation drivers such as fuel prices and meat prices eased in August. Fuel prices decreased by 3.8% between July and August, with petrol falling by 5.0% and diesel   by 0.9%.The food and non-alcoholic beverages (NAB) index increased by 11.3% . But the annual rate is still more than 46%. Food inflation remains stubborn, as the food and non-alcohol prices rose 11.3%. Bread & cereals registered an increase of 3.1% between July and August, pushing the annual rate from 13.7% to 17.8%. Maize meal increased by 4.8% from July, taking the annual rate to 29.1%1. Brown bread registered a monthly rise of 2.2% and cake flour 3.9%[i].

The South African economy could not stay above water in the 2nd quarter of 2022, the KwaZulu-Natal (KZN) floods coupled with rolling blackouts sunk Africa’s most industrialized economy into a contraction. The manufacturing industry was the hardest hit as it got a double blow from rolling blackouts and KZN being a major manufacturing hub in South Africa, as well as a key transit route. The manufacturing industry lost nearly 6%.[ii]  Finance and business services were the only bright shoots in the economy posting gains of 2.4%. The overall economy (GDP) contracted by 0.7% year-on-year.

The South African trade surplus narrowed to its lowest level since May 2020, as exports declined by 1% and imports rose by 10%. The lower commodity prices can be attributed to the lower trade surplus number as exports of precious metals and stones declined by R5.4 billion (-15%); base metals by R2.0 billion (-11%) and chemical products by R1.5 billion (-13%).[iii]

The South African equity market continued its decline well into September as the local bourse closed more than 4% down for the month of September and close to 2% for the quarter. The overall index was dragged lower by heavy losses from the property sector (albeit a relatively small weight in the overall index) as well as the industrial sectors, both sectors suffered losses of excess of 6%. The Industrial sector was dragged by the two heavyweights Naspers and Prosus as their crown jewel, Tencent, was down 17% for the month[iv].

The Resources sector was the only bright spark in the market in September, as mining giants such as BHP Billiton and Sibanya closed by more than 6% and 9% up for the month.[v]


US Markets

The world’s largest economy recorded a second consecutive quarter of negative growth, which led it to be in a technical recession.  Even though the economy is expected to be heading to a recession (or could even already be officially in a recession), the US economy added more than 315 000 jobs in August pushing unemployment to a record low of 3.5.[vi]

Jay Powell increased interest rates for the 5th consecutive time, the 75 basis point hike brings the Fed funds rate to 3- 3.25%, the highest level since 2008. The aggressive interest rate hike is an effort by the Fed to contain the 8.3% inflation number, which is way above the Fed’s target of 2%. Even though the current 8.3% is lower than 9.1% in July, the Fed hinted that they may continue using aggressive methods to tame the red hot inflation number  The Fed is also considering extreme methods such as demand destruction (crashing the economy to recession) in order to control the inflation number. The FED  will agressivelly increase rates and try to tame demand .[vii]

The Dollar Index (measures the strength of the US dollar against other major currencies) has reached levels last seen two decades ago as the greenback has strengthened against major currencies. The Euro fell below parity to the Dollar for the first time in more than 20 years. The Pound was also in free fall, as news of possible tax changes during a recession spooked the markets and sent the Great British Pound to its lowest level ever.  

US equity markets have had the worst month since the 2020 pandemic, the broad blue chip index-the S&P 500 closed down 9.2% in September, bringing the total losses for the year to 23%. Fears of a prolonged recession and rising bond yield has sent the markets nose diving[viii].


European Markets

The suspected terror attacks on the Nord Stream pipeline on two pipelines has exacerbated the European energy crisis.  Washington and the Kremlin are pointing fingers at each other as possible culprits of the sabotage. The disruption in energy supply can make the European winter colder as Europeans are asked to cut on their energy supplies.

Russia’s squeezing of gas supplies to Europe after its invasion of Ukraine has sent energy prices surging and forced governments to intervene by spending hundreds of billions of euros to shield consumers and businesses from the fallout. Energy prices rose 40.8 per cent in September, up from 38.6 per cent the previous month

The European Central Bank is expected to raise interest rates by 75 basis points in their October meeting and even further in December. This as inflation hit a new high for the 11th time in a row. The 19-member state area’s inflation was 10% in September[ix]. 

Russia’s squeezing of gas supplies to Europe after its invasion of Ukraine has sent energy prices surging and forced governments to intervene by spending hundreds of billions of euros to shield consumers and businesses from the fallout. Energy prices rose 40.8 per cent in September, up from 38.6 per cent the previous month.

European markets followed the global trend as the sell-off continued well across Europe, the broader European index fell by more than 9% as the risk of sentiment rattles the market[x].


Emerging Markets  

The Chinese government continued its zero Covid-19 policy well into Q3, this has weakened demand and will come with a huge cost to the Chinese economy. This comes as the Politburo announced that the Chinese communist party is expected to go to congress and Xi Jinping is expected to be elected for his 3rd -5 year term.

Turkey’s year-on-year inflation rate rose for the fifteenth consecutive month to 80.2%, this as Turkey has the lowest real rates in the world. As policymakers embark on a growth strategy that involves cheap money, the Turkish Central Bank recently went against the global trend and cut rates again by 100 Basis points . The Turkish Lira is the worst-performing emerging markets currency against the dollar this year.

Latin America’s biggest economy is arguably having the tightest election race the country has faced. Brazilian far right-wing president Jair Bolsonaro is facing off with former president Lula da Silva. During their first round, Lula came marginally on top with 48% of the votes with his rival receiving 43%. Lula is expected to take most votes from the minor candidates who now drop out, and should be favourite to win in the second round on 30 October. However it might be not a smooth sailing as Jair Bolsonaro actually performed better than polls. The Brazilian equity  is one of the few bright sparks this year , the Brazilain market was up more than 8% for the quarter .[xi]

[xii]Emerging Markets came under pressure in 3rd quarter of  2022 . The S&P Emerging Market BMI was down 9% for the quarter and 10% for the month of September. China shares were amongst the hardest hit, as they nearly lost a quarter of its value in just over 3 months. In a surprise turn of events, despite runaway inflation and a nose diving currency the Turkish market was amongst the best performing markets in the third quarter gaining more than 18% supported due to currency weakness.


A Note to OUTvest Clients

“When it’s raining gold, reach for a bucket, not a thimble“ - Warren Buffett. These are the words from arguably the greatest investor of all time.  He uttered these words after profiting from buying while there is panic during the height of the 2008 financial crisis.

The pullback in the markets has caused huge destruction to wealth of many clients, however the selloff came with an opportunity as valuations begin to fall below the historic average. Trying to pick the bottom is extremely difficult, but panic in the market sometimes comes with opportunity. It is very difficult to say we would be out of the current situation next month or even next year, but it might rain gold soon and you better have your bucket ready.

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 advice on your personal financial goals.  Collective investment schemes are generally medium to long-term investments.


[i] https://www.statssa.gov.za/?p=15754
[ii] https://www.statssa.gov.za/wp-content/uploads/2022/09/gdp1.png
[iii] https://businesstech.co.za/news/finance/631163/south-africas-trade-surplus-drops-to-r7-2-billion/
[iv] Infront Proffessional Services
[v] Infront Professional Services
[vi] https://www.bls.gov/news.release/pdf/empsit.pdf
[vii] https://tradingeconomics.com/united-states/inflation-cpi
[viii] sp-global-equity-indices-monthly-update.pdf (spglobal.com)
[ix] https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area#:~:text=Euro%20area%20annual%20inflation%20is,from%209.1%20%25%20in%20August%202022.
[x] Performance Reports | S&P Dow Jones Indices (spglobal.com)
[xi] sp-global-equity-indices-monthly-update.pdf (spglobal.com)
[xii] sp-global-equity-indices-monthly-update.pdf (spglobal.com)
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