Quarter One - 2022
The table below provides a review of key domestic and international investment indicators for the past quarter, as well as over longer periods.
South African asset classes (in rands)
Global asset classes (in dollars)
* Updated annually from 1900, or longest available period
Returns for periods longer than 12 months are annualised.
International market commentary
After a very strong 2021, the first quarter of 2022 proved more of a challenge for markets. Concerns over rising inflation, tightening monetary policy, and the Russian invasion of Ukraine, meant most asset classes lost ground over the quarter.
Russia’s invasion of Ukraine towards the end of February was unquestionably the main story of the quarter. While Russia is not a very large part of the global economy, Russia is a major energy and commodity producer (Ukraine is also a sizeable exporter of wheat and sunflower oil) and the escalation of tensions pushed energy and commodity prices to extreme levels, exacerbating the surge in inflation caused by supply chain disruptions as a result of the pandemic, and acted as a risk to global growth; especially given the dependency of Europe on Russian gas and crude oil.
High and persistent inflation (largely as a result of supply-side issues) meant that the central bank narrative that inflation was “transitory” began to change at the beginning of the year, and over the quarter central banks became gradually more hawkish, driving bond yields higher. In fact, the US Federal Reserve raised its target rate by 0,25% in March, the first time since the pandemic, with the expectation that many more increases will be necessary over the next two years. The Bank of England raised its policy rate twice in the first quarter, reaching 0,75%. These increases in interest rates, albeit from a very low level, indicate that despite the uncertainties and economic effects related to the geopolitical situation, central banks view inflation, and keeping longer-term inflation expectations well anchored, as paramount, unless the growth outlook deteriorates sharply. With unemployment currently at post-pandemic lows in many countries, but inflation at multi-decade highs (US 7,9%, UK 6,2%, Europe 7,5%), you can understand why central banks are starting to tighten monetary policy. The dilemma for central banks, over the next few years, will be stemming inflation without tipping economies into recession.
It would be fair to say that, although March saw developed markets recover some lost ground, it was not a good quarter for risk assets, with many equity markets posting their first quarterly loss since the onset of the pandemic in Q1 2020. Global equity markets fell -5,3% (in US dollar terms) on the quarter, despite rallying +2,2% in March, with the areas more economically exposed to the Russia - Ukraine situation either directly, such as Emerging Markets (-6,1%), or indirectly, such as Europe ex-UK (-5,4%), falling the most during the quarter. It may come as some surprise but the UK stock market (+4,7%) was one of the best performing regions, as it benefited from its relatively high weight to materials and energy stocks. In terms of style, growth stocks (-9,7%) significantly underperformed the more value / cyclically (-0,8%) orientated equities.
Turning to fixed income markets, despite the brief “flight to safety” when Russia invaded Ukraine, there was no place “to hide” in fixed income during Q1, with rising inflation, the expectation of faster rate hikes from central banks, combined with falling equity markets / risk appetite putting all bond markets under pressure. Looking at the detail, global government bonds posted a big negative return over the quarter (-6,2%).
In terms of “real assets”, global property markets slightly outperformed global equity on a relative basis with the global REITs index down -3,8% over the period. However, commodities stole the show yet again (after a very strong 2021) with the Bloomberg Commodity Index (+25,5%) up sharply in Q1, led mainly by Crude oil (+38,3%), Industrial metals (+22,7%) and Agriculture (+19,9%) as a result of supply concerns due to the war between Russia and Ukraine. Gold (+6,6%) also jumped higher due to related risk-off and inflation fears but nowhere near the magnitude of the other commodities.
Domestic market commentary
After a mixed start to the year, the local equity markets 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 +20,2% since the start of the year. Benefitting from high commodity prices, the resources sector gained +18,2% over the same period, 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.
Investor sentiment towards South Africa was broadly positive in February. The rand gained solid momentum after President Cyril Ramaphosa delivered an encouraging State of the Nation Address on the 10th of February. Later in the month, Minister Enoch Godongwana tabled the 2022 National Budget, showing improved fiscal metrics for the country. As expected, a surge in government revenue, boosted by a jump in corporate tax revenue, helped to reduce the budget deficit to 5,7% of GDP in fiscal 2021/22. From this firmer footing, the government set a slightly faster pace of deficit reduction for the next three years.
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 FTSE/ All Bond Index gained +1,9% over the quarter, with wild swings, as global central banks turned more hawkish, meanwhile, the rand traded up +11,3% against the majors for the year’s first quarter.
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-19 levels. Stage 4 load shedding in the final month of the quarter was a reminder of the energy constraints and the risk it poses to the growth outlook, nonetheless some positive news came from the easing of further Covid-19 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.