January 2022

January 2022

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December 2021

International overview

New highs 

Global activity data suggests that manufacturing held up towards the end of the year, despite renewed lockdown measures in many countries. Services, as expected, was impacted to a greater extent as travel bans and limitation on movement dampened some festive cheer. The US economy grew by an annualized 6,9% in the fourth quarter, supported by consumer spending ahead of the typical festive season. The US recorded GDP growth for 2021 at 5,7%, the highest annual rate in decades. The IMF released its World Economic Outlook for 2022, forecasting global growth of 4,4% for the year, a downgrade from the previous forecast of 4,9%. 

Although energy costs and food inflation remain active drivers of global inflation, inflation outcomes continue to exceed expectations, suggesting broadening pricing pressures. In December, US inflation (7,0% y-o-y) reached the highest level since 1982. Eurozone inflation also recorded a new historic high, reaching 5,0% year on year in December. At 5,4%, the UK recorded its highest inflation reading in 30 years. 

China recorded economic growth of 4,0% y-o-y in the fourth quarter, bringing full year growth for 2021 to a credible 8,1%. Growth momentum has however been slowing in the latter half of the year, as a weaker property sector and the country’s strict COVID policy and restrictions weighed on the economy. In contrast to the rest of the world, inflation in China has shown early signs of moderation. With the emergence of Omicron and moderating inflation prints, Chinese policy makers have started easing policy including cuts to several benchmark lending rates. 

MARKET PERFORMANCE (USD) 

Global equity markets had a tough start to the year with several developed markets experiencing drawdowns. The S&P 500 lost 5,2% in January, while the technology heavy Nasdaq 100, which is largely comprised of growth stocks, sensitive to interest rates, declined by 8,5%. Many European indices also lost ground, while the UK’s FTSE 100 managed a mere 0,2%. Emerging markets also lost ground, with the MSCI Emerging Markets Index declining 1,9%. This, despite a recovery in the Hang Seng, which gained 1,7%. The MSCI World Index declined 5,3% in the first month of 2022, bringing returns over the last twelve months to 17,0%. OPEC+ confirmed another gradual increase to production from February but given that these targets have not been met of late, this did little to appease medium term supply or price concerns. The upward march in oil prices accelerated as geopolitical tensions between Russia and the Ukraine remain high, and with it the potential for supply disruption. The price of Brent crude oil ended the month above $90, a circa 17% increase from the start of the year. 

Global bond markets traded under pressure, as bond yields rose to reflect more hawkish sentiment. The US 10-year bond yield jumped in the first few weeks, ending the month at 1,78%, the highest level since April 2020. In US dollar terms, the Barclays Global Aggregate Index declined by 2,0% in January. 

The main game in town  

In December, the US Federal Reserve (Fed) communicated an accelerated pace of tapering of bond purchases, to end in March 2022, and signaled earlier interest rate hikes. But it was the hawkish minutes from this meeting, released in January, and several eyewatering high inflation prints that sent the markets climbing the wall of worry. Commentary from Fed governors later in the month brought into focus the possibility of a hike as early as March and consideration for increments of 50bps. Fed chair Jerome Powell’s hawkish comments at the January meeting confirmed plans to decrease the Fed’s balance sheet and convinced some economists that seven hikes over 2022 were possible. With US unemployment down to 3,9%, within distance of pre pandemic levels, markets now consider many suggestions not only possible but probable. If the market’s response in the first month of this year is anything to go by, 2022 is going to be a volatile year, with policy makers setting the tone. 

Domestic overview

MARKET PERFORMANCE (ZAR) 

Funding

South Africa secured $750 million in funding from the World Bank after a period of talks. The development policy loan has a thirteen-year repayment period with a three-year grace period. The money will support implementation of government’s COVID-19 response to promote economic recovery and extend social support and was already included in the foreign funding figures in the Medium-Term Budget Statement in November. 

At 5,9%, the final inflation print for 2021 hovers uncomfortably close to the SARB’s 6% upper limit. This also makes for a difficult backdrop as energy regulator, Nersa, undertakes public consultation on Eskom’s proposal of electricity tariff increases in excess of 20% for 2022/23. A decision is due in February. In line with expectations, the South African Reserve Bank (SARB) increased interest rates by 25bps, in a split vote of 4:1. The Monetary Policy Committee emphasised a preference for a gradual interest rate hiking cycle, but that near term inflation risks remain to the upside. Despite a volatile backdrop for emerging markets, the Rand appreciated by circa 3,8% against the US dollar, even as the US Dollar strengthened against its major trade partners over the month. The All Bond Index gained 0,8% in January, supported into month end by credible tax revenue data for December, especially for corporates. 

The preference share market continued to be supported by the prospect of a rising interest rate environment and potential for further corporate action, with the FTSE/JSE Preference Share Index returning 4,1% in January. 

Local equity markets had a mixed start to the year with the FTSE/JSE All Share Index gaining 0,9% in contrast to the FTSE/JSE Capped SWIX 40 at 3,4%. Resources started the year on a strong note, with the sector gaining 3,9%. Rallying oil and gas prices benefitted domestic play Sasol (+33,2%), while financials were spurred higher by rising global bond yields. Domestically exposed small and mid-cap counters lagged their large cap counterparts, finishing the month down 1,3% and 0,4% respectively. Despite corporate activity unlocking value in certain property counters, the broader sector declined by 2,9%.