.jpg)
Summary of views
Growth: We expect GDP growth of 1.8% yoy in 2022 and 1.9% in 2023.
Currency: Our neutral range for the USDZAR is between 15,10 and 15,70, with a year-end target at 16,00. As such, we remain better buyers of USD when the rand strengthens below this range.
Inflation: We forecast CPI (average) at 5,6% in 2022 and 5,2% in 2023.
SARB: We expect SARB to hike by 25 bps in March. We forecast another 75 bps worth of hikes in 2022, taking the repo rate to 5.0% by year-end.
Bond yields: 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%.
Rating action: South Africa’s fiscal stance has benefitted from the tax revenue overshoot and savings on the public sector wage bill. These have helped narrow the primary budget deficit and project a small surplus by 2023/24 compared to what was expected in prior years. Furthermore, we now expect a much slower pace of debt accumulation over the medium-term. However, rating agencies remain cautious, as long-run risks to GDP growth and fiscal stability still weigh on the credit outlook. The agencies still worry about the impact of global rate increases on emerging-market risk sentiment and the impact of local socio-political pressures on expenditure ceilings. Eskom and other SOE bailouts continue to cloud the fiscal outlook, while structural reforms are only taking shape slowly. Fitch rates South Africa “BB-/Stable”, Moody’s “Ba2/Stable.” and S&P “BB-/Stable”.
Gold – don’t let it burn a hole in your pocket
“War in Europe”, “Record inflation”, “Surging oil prices”. These are headlines that make one’s hair stand on end. To investors, these signal significant uncertainty and volatility. The natural response is to rush into gold. However, insurance should be bought before the event, and piling into gold now may be too late, as gold is already pricing in plenty of geological turmoil, in our view. However, many investors expect further market disruptions and continued high inflation. Owning gold in this environment makes sense, but we would not be rushing into new gold positions at these levels.
Gold price boom
A higher gold price would certainly lift the fortunes of the gold producers and should again boost revenue and margins as it did over the past year. It would also keep highercost marginal resources in play and continue to fuel interest in gold equities.
It’s tough out there – inflationary pressure is building
However, it was clear from the latest results season that the sector needs all the price support it can get. The gold sector faces several challenges that could weigh on the operational performance and margins. These factors are adding inflationary pressure, and there have been sharp increases in cash costs and capital bills. AISC and AIC are expected to rise further in the coming year and could see further margin erosion, in the absence of a higher gold price.
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 - March 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.
Wars, rising inflation, higher interest rates and lower economic growth – and a possible recession in 2023
March was, as expected, characterised by central banks increasing interest rates to contain runaway consumer price inflation (CPI), partly fueled by additional supply chain disruptions caused by the conflicts in the Ukraine and Middle East. An eye should be kept on the pace and magnitude of interest rate increases, as it will determine whether another recession is awaiting the world economy.
CPI in lots of countries advanced to almost record heights in February/March 2022. US CPI increased to 7.9% year on year (y/y) in February – the highest in more than 40 years. In the UK it increased to 6.2% in February from 5.5% in January - the highest since 1992. Euro Area CPI rocketed to 7.5% in March from 5.9% in February – an all-time high.
At this stage World CPI is expected to peak in Q3 2022 (above 7%) and average 6.4% for 2022 (more than double the 3.4% of 2021). Average US and UK CPI for 2022 is expected above 6%, that of the Euro Area at 5.5%, and of emerging markets close to 8%. Russia’s CPI is expected to average around 24% in 2022.
In reaction to consistently increasing CPI, central banks acted - with the Federal Reserve increasing interest rates by 25 basis points. The Fed’s expectation of PCE Core CPI for 2022 was revised upward to 4.1% from 2.7% and to 2.6% from 2.3% for 2023. Consequently, the Federal Reserve’s median interest rate forecast increased from 0.9% to almost 2%, pointing to interest rate increases at every meeting, and some increases may be 50 basis points.
The European Central Bank (ECB) “surprised” by announcing a faster exit from bond purchases – by Q3 2022. The ECB however also mentioned interest rates would only increase after the end of net purchases under the Asset Purchase Programme - and will be gradual. The ECB revised its economic growth projection for 2022 from 4.2% to 3.7% and highlighted it could be as low as 2.5% in a more adverse scenario. The Bank of England raised interest rates three times since December 2021 and is expected to raise rates by at least another 75 basis points.
Several culminating factors are driving World CPI. CPI was originally forced upward by supply chain disruptions emanating from COVID-19 and lockdowns, and strong demand accruing from fiscal and monetary stimulus – causing demand to exceed supply. High commodity prices and droughts eventually found its way into consumer prices at a time when Russia invaded the Ukraine. This fueled oil prices further, while putting huge pressure on food prices – due to Russia and the Ukraine’s large production of some crops and fertilizers.
In South Africa CPI is expected to peak close to 7% and average 5.5% in 2022, with fuel, food and municipal rates the big drivers. The South African Reserve Bank raised interest rates by another 25 basis points in March (75 basis points since November 2021), while economic growth is expected to average 2% in 2022. The minister of finance announced measures to reduce the impact of high fuel price increases on consumers (for instance R1.50/l will be “subsidised” by government until May). This is likely to reduce the number of interest rate increases this year – to three more rate increases of 25 basis points each instead of four.
Multivest Economic Division