SUMMARY OF VIEWS
Growth: We now see downside risks to growth in SA, prompted by the onset of the fourth COVID-19 wave of infections, the discovery and spread of the new Omicron strain, and more frequent occurrences of stage 3 and 4 load shedding. Demand and output may be curtailed if there are further lockdown restrictions imposed. Our forecast for real GDP growth in 2021 is 5,0%, while the 2022 estimate is 2,0%. Inflation: SA CPI surged to 5,9% yoy in December, from 5,5% in November, worse than consensus expectations of 5,7%. Core inflation rose 10 bps to 3,4% yoy, while both goods and services inflation rose to 8,5% and 3,3% yoy, respectively (from 7,9% and 3,1% previously). Administered prices were up 15,6% yoy, from 14,1% in November. CPI is now at the highest level since March 2017 but is expected to ease marginally in 1Q22. Our CPI estimate for the year continues to tick up as a result of the rising oil price. We now estimate a 4,5% inflation rate for 2022, and 5% for 2023, with upside risks to our near-term CPI forecasts. Monetary policy: In line with our expectations, the SARB MPC raised the repo rate by 25 bps to 4,00%. This decision, with four members voting for a hike and one member voting for a hold, was less hawkish than our expectations, despite SARB raising its 2022 CPI forecast sharply (up 60 bps to 4,90%). We maintain our forecast for a cumulative 75 bps increase to the repo rate by the end of 2022, compared to a more hawkish QPM reflecting hikes of 116 bps (previously 167 bps). We believe SARB may continue with its gradual rate hike path by raising the repo rate again in March 2022. Fixed income: The SAGB yield curve bull flattened in January as yields declined across the curve apart from the R2023, which rose 22 bps as a result of expectations for a hawkish SARB MPC meeting. Yields across the nominal yield curve fell an average 15 bps during the course of the month, particularly driven by demand for long-end bonds and the R186. Global factors, including a tighter monetary policy stance, higher global inflation rates and a higher risk-free rate (UST yields), have raised fair-value yields since our last update. Our fair-value estimate for the 10-year yield is 9,9% (R2032). We adjust our fair-value range for the R2048 50 bps higher to 10,50-11,00%. We see our fair-value as a three-month view. Currency: While we still pin the rand’s fair value at 15,20, unchanged from early December, we adjust our fair-value range to 15,10-15,70 (from 14,80-15,50 previously). Although this is only a marginal change, we make this adjustment to better reflect the upside risk that is building for the USDZAR, largely through higher oil prices.
Global inflation rates remain sticky and elevated
US CPI surged to 7% yoy in December, a 39-year high, up from 6,8% previously, in line with consensus forecasts. Core inflation, however, surged and surprised to the upside, rising to 5,5% yoy, from 4,9% in November, compared to expectations of 5,4%. The surge in core implies that demand-pull inflation is quite elevated in the US. The surge was driven by prices of food, apparel, used vehicles, medical care and other goods and services. While energy costs ease, these may rise more materially in the coming months as the oil price continues to rise.
Eurozone CPI was finalised at 5% yoy in December, from 4,9% in November, in line with consensus. Core CPI remained unchanged at 2,6% yoy. Prices of food, alcohol and tobacco, and of non-energy industrial goods rose further in December, while services inflation eased 30 bps to 2,4% yoy. Energy prices are up 25,9% yoy, but have eased from the +27,5% yoy rate recorded in November.
UK CPI rose to 5.4% yoy in December, from 5.1% in November, worse than estimates of 5.2%. A marked acceleration in prices of food, industrial goods, housing, medicines and vehicles drover the surge in UK CPI. Prices remain elevated due to shortages of products in the global supply chain.
Global inflationary pressures remain elevated on the back of the rising oil price, global supply chain bottlenecks, shortages of key inputs (such as semiconductors) and widespread product shortages, as supply cannot keep up with global demand in the near term. There are now concerns that elevated inflation rates are more lasting than transitory, and we now see global central banks responding to high inflation with greater urgency.
EQUITY INDICES continued to decline in response to hawkish Fed; oil rises to 7y high
Equity markets fell sharply in January as a result of a hawkish Fed that plans on raising rates multiple times this year. The S&P 500 index ended the month down 5,3%. This was the biggest monthly decline since the March 2020 rout, and the worst January performance since 2009. Equity volatility remains elevated after the VIX Index rose to a one-year high in January.
All major global equity indices ended the month lower in USD terms, with the Nikkei losing 7%, the Eurostoxx50 down 4,3% and the FTSE 100 index losing 3,9%. While EM equity indices also lost some ground, the losses were more muted. The MSCI EM index was down 2% in January. The JSE All Share Index bucked the global trend, ending the month up 4,3% in USD terms.
Looking at commodity price performance during the month, gold was down 1,8% in January as the USD strengthened, making the metal more expensive and less attractive to investors. The Brent crude price rallied sharply in January on the back of better demand conditions globally. The price was up 17,3% in January, rising to the highest since September 2014. While the oil forward curve is in backwardation (falling future prices), the forward curve has risen by USD5-10/bbl in the past month. OPEC+ plans on raising its monthly output of oil in order to stem the price increase, but many member countries have indicated that they will be unable to meet the additional supply quotas as a result of geopolitical conflict, no investment, or capacity constraints.
USDZAR fair-value range marginally weaker; hawkish Fed could keep the rand weak
While we still pin the rand’s fair value at 15,20, unchanged from early December, we adjust our fair-value range to 15,10-15,70 (from 14,80-15,50 previously). Although this is only a marginal change, we make this adjustment to better reflect the upside risk that is building for the USDZAR, largely through higher oil prices.
A US Fed that is now seen to be hiking five times this year after the latest FOMC meeting may add upside pressure, although we still believe some depreciating pressure emanating from the Fed would be largely absorbed by SARB, which is also hiking, and favourable terms-of-trade.
Our adjustment does imply, however, that we would turn USD buyers sooner than previously expected. If the oil price retraces closer to USD75/bbl, we would turn more bullish on the rand. Our year-end target for the USDZAR remains at 16,00.
Currently, the oil/USDZAR relationship suggests that with oil at USD87/bbl, the rand should be close to 15,30 against the USD. Oil at USD85/bbl would be consistent with our current fair value for the USDZAR of 15,20 and within our fair-value range of 15,00-15,60. However, an oil price that goes to USD100/bbl could put the currency under substantially more pressure than what we have observed in recent months. Ultimately, the best level of the oil price for the rand (and inflation) currently seems to be in the USD65-75/bbl range, which would put the rand at USD14,70.
Source: 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 - January 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.
Inflation and interest rate changes are expected to dominate 2022
Indications are for “less-COVID-19-disruptive-but-still-lower” global economic growth; high but declining global consumer price inflation (CPI); increasing interest rates in most countries; a decline in the All-Commodities Price Index; and less supply chain disruptions in 2022. At the same time, new COVID-19 variant induced lockdowns, as well as intensifying tensions between Russia and the Ukraine and China and Taiwan can change the above expected global economic outcome.
In January the International Monetary Fund (IMF) lowered its estimates for global economic growth for 2022 and 2023. The estimate for last year is 5.8%, declining to 4.4% in 2022 and further to 3.8% in 2023. The lower estimated global economic growth rate is driven by a slowing of growth in the USA from 5.6% in 2021 to 4% in 2022, while China’s growth is expected to decrease from 8.1% to 4.8%.
The IMF estimates CPI in advanced economies to rise from 3.1% in 2021 to 3.9% in 2022 and then to subside to 2.1% in 2023. The CPI rate for the Euro area is estimated at 3% in 2022 and 1.7% in 2023 and for the USA it is 5.9% in 2022 and 2.7% in 2023. In emerging markets, CPI is estimated to follow the same pattern – increasing from 5.7% in 2021 to 5.9% in 2022 and then declining to 4.7% in 2023. CPI will be kept high by among others high oil prices and global supply chain disruptions. The IMF expects the average oil price (basket of UK Brent, Dubai Fateh and West Texas Intermediate oil) to increase from $69.07 per barrel in 2021 to $77.31 in 2022, whereafter it is expected to decline to $71.29 in 2023. Supply chain disruptions are expected to continue, although less so. The Federal Reserve Bank of New York’s Global Supply Chain Pressure Index (GSCPI), which signals stress in global supply chains, peaked at 4.37 standard deviations from the average in October, but then declined to 4.25 in December.
Developments in the USA, which should again have the largest influence on global share-, bond- and currency markets, took a turn in the last quarter of 2021, with interest rates now expected to increase earlier due to sticky CPI. In January the Fed expected core Personal Consumption Expenditure inflation to average 2.7% (from 2.3% in September) in 2022. The Fed’s median projected interest rate path indicates three interest rate hikes of 25 basis points each in 2022 and 2023 and two in 2024.
In Europe, economic growth will be affected by countries such as Germany and France which tightened lockdown restrictions in response to the Omicron variant. Spillover effects from a hawkish Fed are expected to affect European Central Bank and Bank of England monetary policy meetings. Markets now expect five rate increases by the BoE this year and for the ECB to start hiking in December 2022.
The expected process of sharp economic deceleration in China started. For instance, the economy grew by 4% in Q4 2021, much slower than the 6% to 8% rates we grew accustomed to. Also, in December 2021, retail sales grew by only 1.7% versus a year earlier – the slowest rate on record (other than during the height of the COVID-19 pandemic) – while investment in real estate fell 13.9% compared to a year ago. A slower economy means a deceleration of imports, which will negatively impact the prices of commodities such as iron ore, coal, lumber, steel, and aluminum.
In South Africa, the Reserve Bank increased the repo rate by another 25 basis points and the expectation is for another three increases of similar magnitude. The government’s fiscal deficit is expected to be R80 billion to R100 billion smaller than estimated by National Treasury. However, economic growth is estimated to subside from 4.8% in 2021 to around 2% in 2022. CPI is likely to peak in Q1 2022 and then decelerate to 4% by the end of the year.
Multivest Economic Division