October 2021

October 2021

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September 2021

International overview

Liftoff


Markets retained a razor-sharp focus on all commentary from global central banks that could signal earlier interest rate hikes than anticipated. Incoming inflation data has remained stubbornly elevated, leading to an increase in bets from the bond and money markets that lift off would be sooner than preferred by most central banks. While some argue that market pricing is too aggressive, there are several fault lines in the system that could see inflation at higher levels for longer. Strong demand and a dearth of supply drove energy prices to record highs in October, while raw materials and supply constraints kept pricing pressure elevated, most notably in auto prices, given ongoing semiconductor shortages. US inflation printed at 5,4% year on year, while inflation in the Eurozone rose to its highest level in thirteen years, at 3,4% (y-o-y). Several central banks, including Norway, New Zealand and Poland, have announced their first interest rate hikes, but it was Brazil that caught the eye in October. Although it was the sixth interest hike for 2021, Brazil acted with an eye watering 150bps interest rate hike, the biggest in decades. 

First estimates of third quarter growth data confirm a slowdown across several major markets, reflecting slower growth momentum and the impact from a resurgence in COVID-19 infections over this period. US GDP fell short of expectations, growing at 2%, (annualised) over the quarter while real GDP growth in China eased to 4,9% y-o-y from 7,9% y-o-y in the previous quarter. The Eurozone showed marginal improvement in quarterly growth, with fewer restrictions across member states adding to an improvement in activity. 

Market performance (USD) 




Equity indices made new highs in October, despite a market that remains alive to inflationary pressures and the upcoming withdrawal of liquidity. The S&P 500 gained 7,0% in October, while the technology heavy Nasdaq 100 gained 7,9%, supported by a credible start to the US third quarter earnings season, with more than 80% of companies that reported, beating expectations. After stand-out performance in the previous month, Japan reversed much of the prior month’s gains, declining 4,0% in October. Risk taking did not quite extend to emerging markets, with the MSCI Emerging Markets Index gaining a modest 1,0%. Chinese markets showed signs of stabilisation, delivering 3,3% growth over the month as investors took stock of the restructuring progress in the property market. With this backdrop, the MSCI World Index advanced 5,7%, brining returns over the year to 19,9%. 

Global bond markets traded under duress for much of the month, with yield curves flattening as investors price for earlier rate hikes against inflation data that has yet to show signs of moderation. With some volatile trading sessions, the US 10-year bond yield increased modestly over the month, touching 1,7% at one point. These trends provided a headwind for interest rate sensitive assets, especially those exposed to shorter dated bonds where possible interest hikes were most vividly reflected. In US dollar terms, the Bloomberg Barclays Global Aggregate Bond Index returned -0.2% in October. 

Green funding for a green world

The European Union’s €12bn inaugural green bond reportedly garnered demand of more than €135bn, delivering the world’s largest green bond deal to date, as it surpassed the UK’s £10bn debut the previous month. This provides a solid foundation for the EU, with more to come from Europe’s €800bn Recovery Fund, with on average a third of debt earmarked for green bonds to support sustainable projects. 

Heading into November, world leaders gathered in Scotland for COP26 (the 26th Conference of Parties), to discuss and deliberate climate goals and funding for sustainable solutions. With ambitious goals for both countries and companies, sustainable funding looks set to become an interesting and growing part of capital markets – offering private capital ways to contribute to green energy, sustainability, and other social goals. 

Domestic overview

Market performance (ZAR) 




Summer session 

With local municipal elections set for early November, campaigning dominated headlines. Worsening load shedding upped the stakes as it highlighted the state of service delivery and the importance of the proposed energy reforms. The Department of Minerals and Energy announced the preferred bidders for the fifth round of the Renewable IPP Procurement Programme, which is expected to add about 2500MW of capacity in due course. South Africa was removed from the UK red travel list, removing another obstacle to an improved summer period for the beleaguered tourism sector. The SA Reserve Bank’s Monetary Policy Review highlighted an intensification of inflationary risks, increasing the market related probability of a hike in interest rates in November 2021. Monthly increases in both producer and consumer price indices added to the argument. The Rand weakened by circa 0,7% against the US dollar in October and a rise in global bond yields weighed on the local bond market. The All Bond Index declined by 0.5% in October, dragging the returns over the year to 4.8%. 

Bank preference shares had another outsized month of performance after Investec Bank announced that it is making a firm offer to buy back all outstanding listed preference shares issued by Investec Bank. This helped the asset class gain 10,9% over the month, bringing performance year to date to 37,0%. 

After a difficult third quarter, local equity markets recovered some lost ground, with the FTSE/JSE All Share Index gaining 5,2%. Domestically exposed small and mid-cap counters continued to print positive returns, but large cap counters outperformed with positive returns from bellwethers Naspers (3,9%) and Prosus (11,4%). The resources sector rebounded 8,4%, with notable performance from the precious metals sector (+18,3%), while financials declined by 3,8%, reversing recent positive trends. The interest rate sensitive property sector declined 1,7% over the month. The removal of travel restrictions for UK holiday makers and less stringent local lockdown restriction helped the travel, leisure, and services sectors to top the lists for sector performance in anticipation of a better holiday season.