The Russia-Ukraine war dominated headlines over the month, but markets also kept a keen focus on insights from key central bank meetings. Sanctions against Russia intensified, with several countries, including the US and UK, announcing bans on oil imports from Russia. A number of global companies have voluntarily shunned buying oil from the country and others have temporarily closed operations. Index providers, notably MSCI and FTSE, removed Russian equities and bonds from their benchmarks, which will likely prompt further outflows from this market. With financial sanctions impacting the currency and conversion thereof, whether the country will be able to continue to service their hard currency sovereign debt payments remains a key concern. Progress in talks between Russia and Ukraine prompted some optimism for a de-escalation of military action, helping to stabilise markets. With the war waging on multiple fronts though, Russia has demanded that natural gas payments be made in Russian Ruble from 1 April, although the demand was tempered by allowing payments in other currencies though a designated bank.
Not to be forgotten, COVID-19 cases in Europe have been on the increase. Countries around the world are transitioning to living with the virus and restrictions continue to be eased. In contrast, China has remained steadfast in its low tolerance response. With the country battling a new wave of infections, China implemented regional lockdowns which included Shanghai and Shenzen, both economically important with export linkages. While the disruption is being managed by staging restrictions in Shangai for example, it is likely to worsen supply chain challenges for certain products.
Despite some calls from within the group for an increase in production, OPEC+ members, which include Russia, maintained a gradual increase in production. The price of Brent crude oil traded wildly on news flow over the month, including attacks on storage facilities in Saudi Arabia and storm damage to a pipeline in Russia, which added to energy supply concerns. After intramonth highs, the price of Brent crude oil moderated into month end as the US announced the release of a million barrels of oil per day from its strategic oil reserves for six months.
Although equity markets recovered some lost ground in March, global equity and bond markets declined over the quarter as the turn of interest rate cycles, more hawkish central banks and impact from the war reverberated across markets. Year to date, the MSCI World Index declined 5,0%, while the MSCI Emerging Markets Index lost 6,9%. Global bond markets sold off under pressure from high inflation prints and hawkish central banks, with the Bloomberg Global Aggregate Bond Index declining by 3,0% in March, bringing the year-to-date decline to 6,2%. US bond markets recorded one of the worst quarterly declines in decades.
MARKET PERFORMANCE (USD)
The US Federal Reserve started its interest rate hiking cycle with a 25bps increase, but there have been increasing calls for a 50bps move from several Fed governors which set the tone for market movements. The Bank of England increased interest rates by 25bps, with interest rates now back at pre-pandemic levels. Eurozone preliminary inflation figure for February printed at 5,8% on the back of higher energy prices, the highest figure since the Euro was introduced and reemphasising the regions vulnerability to the impact from Russia-Ukraine war. The ECB kept rates unchanged and brought forward the end of their asset purchase programme to Q3, suggesting that inflation concerns currently still outweigh growth concerns.
Policy makers are now facing the added complexity of multiple supply shocks and data that remains fluid in the face of the conflict. Against this backdrop, the US bond yield curve has inverted. Historically, this is seen as a bearish signal of slowing growth, with markets pricing in an inflationary problem that requires higher interest rates in the near term, alongside an even higher probability of a recession in a few years from now. Although a better indicator of trend rather than of timing, at a minimum, the markets assessment of risks will weigh on policy makers’ minds in the months to come.
MARKET PERFORMANCE (ZAR)
The long-awaited spectrum auction took place in March, raising circa R14,5bn. This surpassed Treasury’s estimate of R8bn and represents a healthy boost to the fiscus. A court case, brought by Telkom, which will be heard in April, still presents a risk to the outcome of the auction. South Africa recorded economic growth of 1,2% in the fourth quarter of 2021, staging a decent recovery after the damage caused by the riots in the third quarter. This brings 2021 GDP growth to 4,9%. A credible result, but one that still leaves the economy below pre-COVID levels. While stage 4 load shedding over the month reminded of energy constraints and the risk it poses to the growth outlook, some positive news came from the easing of further COVID restrictions as the country moves towards lifting the state of disaster and a temporary reduction to the fuel levy, which will help reduce the impact of rising fuel prices.
Although South Africa is vulnerable to higher oil prices as a net oil importer, high prices for commodities that the country exports, including coal, palladium and gold has supported the Rand this year, helping it appreciate by circa 8,7% against the US dollar. In line with expectations, the South African Reserve Bank (SARB) increased interest rates by 25bps. Three members voted in favour of a 25bps hike and two in favour of a 50bps hike, underscoring a more hawkish stance in the face of multiple risks to the inflation outlook. The All Bond Index gained 0,5% in March, with wild swings, as global central banks turned more hawkish.
Local equity markets ended the month flat but managed to gain over the quarter with the FTSE/JSE All Share Index up 3,8%. Financials was the standout sector for the month and the quarter, gaining 49,7% since the start of the year. Benefitting from high commodity prices, the resources sector gained 31,7% over the quarter, while domestically exposed mid and small cap counters outperformed their large cap peers. In contrast, technology counters, Naspers and Prosus lost further ground over the month as it emerged that Tencent faced a possible fine from Chinese authorities for inadequate compliance measures, while Tencent’s financial results did little to appease markets. This led to higher returns for the FTSE/JSE Capped SWIX 40 over the year at 8,6%. Despite the volatility, it has been a great quarter to be invested in South Africa’s opportunity set.