The spread of the Delta variant provided a headwind to markets in August, reminding of its ability to slow down and disrupt activity. The local impact and severity, however, differed between countries. The UK for example, lifted all remaining Covid-19 restrictions, even as daily cases were on the increase. Increasingly it seems that trade and supply chain interruptions, rather than lengthy lockdowns, have become the more enduring risk. Global vaccination efforts were provided a boost when the Phizer/BioNTech vaccine became the first vaccine to gain full approval from the US Food and Drug Administration (FDA). Europe has now vaccinated 70% of its population, with programmes for booster shots already in the making. At the same time, economic activity indicators are moderating. Normalisation of data was always on the cards, given the distortions of last year, however, the prospect of decelerating growth momentum still gave market participants pause. Although the picture for economic growth is still robust, most recognise that the easy part of the recovery is coming to an end.
Chinese decision makers continued to tighten regulations across several industries where rules have been lax, but also to align business activity to the administration’s goal of “common prosperity”. Given the country’s proven ability to pursue long term goals in the face of short-term trade-offs, more could be expected on this front. The withdrawal of the US from Afghanistan and subsequent resurgence of the Taliban has left an unsettling potential for geopolitical tension. Further developments in the region and the response of world leaders bears monitoring.
Market performance (USD)
The tussle between the pandemic and policy makers made for a month of two halves. With virus concerns weighing on markets, August provided pause for a market correction, followed by recovery into month end as policy makers reassured markets of their accommodative stance. The S&P 500 advanced 3,0% while the MSCI World Index advanced 2,5%. Growth stocks benefitted from policy markers’ reassurance that interest rates will be lower for longer, which helped technology heavy Nasdaq 100 gain 4,3% over the month. Lockdown restrictions and tighter regulations weighed on Chinese stocks and in turn emerging markets. Neither this weakness nor a decline in commodity prices, prevented participation in the rally in risk assets towards month end, helping the MSCI Emerging Markets Index gain 2,6%. Global sovereign bond yields rose modestly, while emerging market and high yield bonds benefitted from risk taking. In US dollar terms, the Bloomberg Barclays Global Aggregate Bond Index returned -0.4% in August.
Every year, market participants listen with anticipation for any implicit or explicit policy guidance from the annual central banker gathering at Jackson Hole. In 2020, the US Federal Reserve confirmed a shift in policy to target average inflation of 2%. Fast forward a year and inflation across the world has risen in the US above the 2% mark. Some drivers will no doubt be transitory, while other areas of pricing pressure may prove to be more persistent. In any event, many would argue that progress has been made on the inflation target, even as the labour market recovery is still underway. It is therefore not surprising that markets have been on tenterhooks trying to understand how the US Fed is thinking about interest rates under this new regime.
Federal Reserve Chairman, Jerome Powell’s speech touched on higher inflation and the continued risk from Covid-19, but more importantly emphasised that the decision and timeline for the withdrawal of liquidity (tapering) and interest rate hikes should be viewed separately. Markets rallied on this commentary, having been guided to focus their attentions on the tapering timeline for now. While the withdrawal of liquidity is unlikely to be without turmoil, policy makers are doing all they can to manage expectations around the path to normalisation – even if it remains unclear what a normal post pandemic market or world will truly look like.
In early August, President Ramaphosa announced a cabinet reshuffle, which included much anticipated changes to the security cluster and a new health minister, following the resignation of Zwele Mkhize. Most influential for markets, however, was the appointment of Enoch Godongwana as finance minister.
Stats SA released revised estimates of the size of the South African economy, accounting for new information and a new base year. GDP for 2020 is now estimated at R5.52 trillion, 11% larger than the previous estimate. The overall trends with regards to real GDP growth, however, remain troubling and the changes to real GDP estimates are much lower. Nevertheless, the new base will improve key economic metrics, such as the government debt to GDP ratio, even if it does not change the absolute debt numbers. The Department of Minerals and Energy gazetted the necessary regulations to raise the threshold for self-generation to 100MW from 1MW, a significant step forward for generation capacity and potential growth. This came in the wake of an explosion at Medupi power station, which dealt another blow to Eskom and an already stretched grid.
Inflation for July was recorded at 4,6%, a further moderation from the 5,2% peak in May, as the impact of base effects subside. Fuel and food prices are two of the main drivers of higher inflation and will remain key to monitor. Inflation linked bonds returned 1,2% over the month. The All Bond Index gained 1,7% in August, bringing the returns over the year to 7,7%.
The local equity market experienced some volatile trading sessions in August, with the FTSE/JSE All Share Index ending the month down 1,7%. A decline in the resources sector (-4,9%), particularly precious metals, added to losses from index bellwethers Prosus (-2,7%) and Naspers (-12,1%) which declined on the news of tighter regulations in China. Domestically exposed small and mid-cap counters outperformed large cap counterparts, while the property sector finished the month up 7,5%. Local equity indices experienced a reset of their own, with the JSE experiencing a record level of trading as money managers adjusted portfolio positioning to account for the new weightings of Naspers and Prosus in indices following the share swap concluded by the company.