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Summary of views
Growth: We see downside risks to growth in SA relative to our forecast, prompted by higher energy prices, excessive load shedding and sl ower global growth. Our forecast for real GDP growth in 2022 is 2%, while the 2023 estimate is 1,9%.
Inflation and monetary policy: Our forecast for CPI remains unchanged we currently project an average annual rate of 6,6% in 2022 and 5,8% in 2023. The risk to both these estimates is to the upside. With inflation remaining sticky and falling too slowly to the CPI target band, we b eli eve SARB will remain more hawkish than less and potentially front load the rate hikes projected in its QPM. We currently forecast a 75 bps hike to the repo rate in September, and while our base case sees another 25 bps hike in November, there is still a material risk that SARB does the full and final 50 bps at this meeting to t ake the repo rate to its terminal projection of around 6,75% sooner than forecast.
Fixed income: With higher US real yields, we adjust our three to six month fair value estimate for the 10 year yield to 10,4% from 9,9% previ ously. On a 12 month view, we continue to see upside for yields, holding a fair value estimate of 9,3% for the 10 year yield in 2023. SA’s nominal bond yields on a real basis remain attractive on an absolute level and relative to EM peers’. This is likely to support buying interest during periods of sellin g p ressure triggered by global events.
Currency: Our fair value estimate for the USDZAR remains 15,50 and our neutral range between 15,40 and 16,00. Cyclically, we favour rand w eakness well above 17,00 and closer to 18,00 into year end.
Global developments:
Peak inflation may be upon us as the oil price eases in July and August
IMF revises global growth forecasts lower; world is at the brink of a recession
Global central banks maintain hawkish monetary policies
Fed stamps its authority at the Jackson Hole symposium, maintains hawkish bias
Source: Bloomberg, Nedbank CIB Markets Research
Disclaimer – The views and observations in this report represent the analyst’s own and not the Multivest nor Nedbank Group house view.
Multivest Chartbook - August 2022
Multivest Portfolio Returns
Disclaimer: The investor is liable for CGT on any transactions in the units of the underlying unit trusts within the wrap funds. Compulsory investments are not subject to CGT. Performance is calculated using net returns(after fees) of the underlying unit trusts, and quoted excluding wrap fund fees. Performance quoted is pre-tax. Fund performance numbers shown are for a notional portfolio and do not reflect the actual performance of the client invested in the wrap fund due to timing differences of investments or disinvestments of the client. Benchmark returns for CPI are based on actual published returns and an estimated one month return for the month of the report date. ASISA Benchmark returns are the ASISA returns available as at the time of reporting.
Engineering demand destruction to “satisfy” lower supply
An expanded world economic downturn - caused by politically driven supply disruptions and aggravated by interest rate increases - is very likely by the end of 2022. And depending on the outcome of some factors, the world economy may remain in the doldrums for a very long time. What caused the supply chain disruptions? First, there was the (still ongoing) trade war between the US and China, followed by the COVID-19 pandemic and lockdowns (with sporadic lockdowns in China continuing ). Also, new climate change (clean energy) policies and targets reduced energy produced by coal, gas and oil – but the decline in supply was not matched by an increase in cleaner energy production, contributing to energy supply shortages. And lastly, the war between Russia and the Ukraine limited the flow of oil and gas to the world, causing a shortage of electricity in especially Europe. Supply disruptions, however, coincided with strong demand growth – a recipe for rising inflation. Indeed, the shortage of supply and strong demand caused the prices of especially oil and gas to add significantly towards consumer price inflation (CPI) rates last experienced in the previous century. Consequently, central banks intervened with front loaded interest rate increases to reduce demand, which contributed to somewhat lower oil prices and slower increases in CPI. The outcome of higher interest rates is declining demand and economic growth - bearing in mind that gas prices in Europe are on a renewed increasing trend following a further reduction in supply from Russia? In this respect Purchasing Managers’ Indices (PMI’s) provide an indication of expected world economic growth. Markit’s global PMI continued its decline in July to 51.1 from 52.2 in June, reaching the lowest level in two years. Moreover, the subindex for global output showed no growth in July. In fact, output fell in economies such as the US, UK, Eurozone, and Japan. In addition, supply was further curtailed when Europe agreed to a self-imposed 15% reduction in gas usage, which in itself will reduce industrial production and economic growth. However, as gas prices remain high the European Central Bank will probably increase interest rates by a further 50-75 basis points to contain CPI which increased to 9.1% in August from 8.6% in June. As such, the European economy is expected to shrink in Q3 2022 and falling into a deeper recession in Q4 2022, continuing a downward trend in 2023 to register negative growth rate of around 0.2%. The story is pretty similar in the UK. The Bank of England expects four consecutive quarters of contraction as it prepares for another hike of 25 to 50 basis points in interest rates. In the US, Federal Reserve chairman, Jerome Powell, in his Jackson Hole speech reaffirmed the Fed’s commitment to bring CPI under control. As such, the interest rate may be raised by 50 to 75 basis points. However, China’s central bank reduced the one-year lending rate by 10 basis points in an attempt to stimulate demand following a range of disappointing economic data. In South Africa, CPI may well reach a peak in August, but the Reserve Bank is expected to continue with hawkish rate increases. Another 75-basis point increase may again occur in September – despite a hefty decline in fuel prices and expectation of negative economic growth in Q2 2022. In addition, the US$ strengthened on the back of risk aversion, causing the rand exchange rate to depreciate to above R17/US$. The weaker rand and still high oil price (US$ 96 per barrel) will, however, limit the strength of the decline in CPI. In addition, as a growing number of goods and services in the CPI-basket are increasing, the SARB will remain hawkish beyond September. Multivest Economic Division
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