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 slower global growth. Our forecast for real GDP growth in 2022 is 2%, while the 2023 estimate is 1,9%.
Inflation: We now pencil in an average inflation rate of 6,6% for 2022 (from 6,1% previously) and 5,6% for 2023. We believe the risk is still to the upside, driven by exogenous factors (the high oil price, supply-chain disruptions and product shortages pushing up prices of goods) and a rise in services inflation as demand for services rises. We see CPI peaking in July 2022 at 7,7% yoy, before coming back down towards the SARB’s 6% upper target band in November and December.
Monetary policy: Given the upside surprise in inflation, we have revised our forecast for the repo rate higher and now forecast a repo rate of 6% by year-end. This view effectively suggests another 50-bps hike by the MPC in July and then 75 bps between September and November.
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% previously. 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.
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 weakness well above 17,00.
Global inflation rates remain elevated, eliciting greater monetary tightening
Global growth at risk of further deterioration, while global trade flows decline
Monetary policy dynamics: Global
Advanced-economy central banks set the tone for global monetary policy
Fed looks to hike another 75 bps in July, ECB set to shift gears, BoE persists with hikes
Most major central banks turned more hawkish in June, amid concerns that inflation may remain elevated for an extended period. In June, central banks in Canada, Australia, the US, the UK, Iceland, Norway, Hungary and Sweden all hiked rates sharply. Among EM countries, central banks in India, Chile, Poland, Peru, Brazil, Botswana, Costa Rica, the Czech Republic, the Philippines and Mexico continued hiking rates in an effort to clamp down on inflationary pressures.
The main reasons for the aggressive tightening cycle are higher inflation, upside inflation risks and a more hawkish global monetary policy rhetoric. With the Fed turning more hawkish in June, opting to end its QE programme and raising rates, and the BoE having started its hiking cycle in December, EM central banks will probably remain hawkish in order to limit capital outflows and adverse impacts to local-currency markets.
SA’s real economy
Fiscal data looks good despite downside risks to growth
SA inflation trends
Surge in transport and food prices results in CPI breaching 6% upper target in May
Monetary policy dynamics: SA
SARB raises the repo rate again in May; puts another 50 bps on the table in July
Credit risk comparison
Credit rating agencies take note of the commodity windfall
SA’s Bond market
SA yields sharply higher across the curve amid global risk-off
The Rand and key risks
USDZAR sharply weaker in June amid global risk-off
EM FX tumbles in broad-based sell-off in June
Equity indices continued to decline while the oil price remains elevated
Equity markets have fallen sharply since January because of hawkish central banks raising rates multiple times this year. The S&P 500 Index is down 21% ytdwhile the Nasdaq Index is down almost 30%. The JSE All Share Index is down 13,4% in USD terms for the ytd. Equity volatility remains elevated.
In June, the FTSE 100 was the worst-performing index, declining 16,6% in USD terms. This was followed by the Euro Stoxx 50 and the JSE All Share Index, both having lost 12,5% during the month. Global equity indices are struggling to find support amid concern over slowing global growth and restrictive financial conditions ahead.
While the Brent crude price fell 6,5% in June amid US recession fears and general global growth concerns, the price is still elevated above the USD100/bbllevel. The uncertain nature of the war will likely keep the oil price elevated in the near term.
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 - June 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.
A recession … not yet, but definitely a fast downturn
Although warning signs are emerging, the US is not in an economic recession. Fast rising interest rates coupled with no or little bond purchases by central banks are however causing distress in some markets. And while recessionary indicators do not indicate an imminent recession, the outlook is for fast sliding economic growth in the US. Due to the inter-connectedness of the world economy, it will negatively affect growth rates across the world, including South Africa, who is dealing with its unique challenges.
An example of how quickly events can change the economic outlook in the US can be found in the Federal Reserve Board’s economic growth projections. Economic growth of 3.3% for 2022 was projected in June 2021 (a year ago). In March 2022, this was scaled back to 2.8% and in June 2022 it was lowered further to 1.7%. However, the US is not in a recession (yet). The Sahm-rule dictates a recession starts when the “three-month moving average unemployment rate” is more than 50 basis points above its “low in the preceding 12 months”. So, the unemployment rate must jump from 3.6% in May to 5.1% in June for the US to be in a recession. Another indicator of a recession is if the two-year government bond exceeds the ten-year yield, which has not happened. Yet, some stresses are building in the housing market, which normally is a sign of a weakening economy. Housing starts fell sharply in May in reaction to rising CPI and interest rates. Furthermore, CPI rose 8.6% in May compared to average hourly earnings of 5.2%, signaling declining purchasing power of consumers. In an attempt to bring CPI down to 2% the Fed hiked the benchmark rate by 75 basis points in June and another 75 basis points in July is likely. The Fed’s dot plot suggests most members expect the rate to peak in 2023 around 3.5% to 4%.
As is the case in the US, both the manufacturing and services PMI fell sharply in the Eurozone, though it remained above the 50-mark, signaling expansion. However, the PMI showed inventories are increasing, suggesting a future cut in production. In addition, the rising cost of energy and continued supply chains disruptions were blamed for weakening demand. Natural gas prices quadrupled in Europe (tripled in Asia and doubled in the US), contributing to high inflation. The European Central Bank (ECB) has so far avoided a rapid tightening of monetary policy, but a 25-basis point hike in July is almost a done deal, while markets are pricing in increases of 165 basis points up to the end of the year. In addition, with the ECB announcing an imminent end to bond purchases, a negative consequence emerged as market jitters surfaced on the sustainability / affordability of debt in Italy and Spain with yields surging way above the German yield.
China’s economy will continue to face headwinds, even as COVID-19 restrictions were eased. The country is still struggling with trade conflicts, the effects of the Russian-Ukraine war, the negative production effect of higher international inflation and interest rates, and declining demand from the US which will have a strong impact on Chinese production – as US retail purchases account for almost 50% of the merchandise exports from China to the US.
South Africa’s economic growth rate should also have slown in the second quarter of 2022 following flooding in Kwazulu-Natal, increased bouts of loadshedding and rising interest rates. In addition, CPI increased to 6.5% in May - driven by fuel and food prices. The petrol price may hit R30/l in August, if the government does not continue its subsidization thereof, while steep municipal rate increases may fuel CPI towards 7% in July/August. The South African Reserve Bank increased the repo rate by 50 basis points in May and is expected to repeat the feat in at least July, whereafter increases of 25 basis points each may occur in September and November.
Multivest Economic Division