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Equity indices continued to decline in response to hawkish Fed
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 13% ytd while the NASDAQ Index is down 22%. Equity volatility remains elevated.
All major global equity indices are also under pressure in USD terms, with the Nikkei losing 4,6% ytd, the Eurostoxx 50 down 11% ytd and the FTSE 100 Index up a marginal 3,1% ytd. The JSE All Share Index is down 3,2% ytd in USD terms.
Summary of views
Growth: We expect GDP growth of 1,8% yoy in 2022 and 1,9% in 2023.
Inflation: We forecast CPI (average) at 6,2% in 2022 and 5,1% in 2023. We expect headline CPI to peak in 3Q:22 at 6,7%.
Monetary policy: In line with our expectations, the SARB MPC raised the repo rate by 50 bps to 4,75% at the May MPC meeting. We expect SARB to hike by 50 bps in July. We forecast another 75 bps worth of hikes in 2022, taking the repo rate to 5,5% by year-end.
Fixed income: Upward pressure on domestic bond yields from higher domestic inflation is offset by higher US inflation and an improved domestic fiscal position. Our fair-value estimate for the 10-year yield is 9,9% (R2032). Our fair-value range for the R2048 is 10,50-11,00%. We see our fair-value as a three-month view.
Currency: We pin the rand’s fair value at 15,50 against the USD. We adjust our fair-value range to 15,40-16,00 (from 15,10-15,70 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 and US recession risk.
US inflation stabilized in April, but still high
US CPI surged to 8,3% yoy in April, marginally higher than the expected 8,2% yoy. The inflation print has, however, come down from the 8,5% yoy seen in March. Base effects may well start to push US headline CPI going into the second half of 2022. That said, US headline inflation is still well above the 2% mark that the Fed would be targeting.
Core inflation also stabilised, but the print still beat expectations. Core inflation rose to 6,2% yoy in April, down from 6,5% in March, compared to expectations of 5,9%. A decline in core inflation would be read as a positive sign and while headline inflation, driven by higher energy and food prices, is likely to keep the Fed hawkish, core inflation could signal more muted inflationary pressures than seen during the first few months of 2022.
Eurozone CPI came in at 7,4% yoy in April and surged to 8,1% in May. Unlike in the US, Eurozone headline CPI shows little signs of stabilising yet. Inflation in the Eurozone has more than doubled since August last year, when the print was still below 4% yoy. Higher energy costs in particular remain a key component of the upward pressure on inflation.
Like the EU’s, UK inflation continued to accelerate, with headline CPI rising to 9,0% yoy in April from 7,0% in March. A marked acceleration in prices of food, industrial goods, housing and energy remains the key driver of CPI. Prices remain elevated due to product shortages 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. We continue to see global central banks responding to high inflation with greater urgency, with even the ECB, which has in general been a laggard, turning much more hawkish.
Source: Bloomberg, Nedbank CIB Markets Research
Multivest Chartbook - May 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.
World braces itself for lower economic growth, higher inflation, and rising interest rates
The world economy is entering a phase where current high consumer price inflation will be accompanied by relatively fast rising interest rates and lower economic growth, in an environment still plagued by the COVID-19 pandemic, albeit less severe. This is not a favourable outlook for countries with already high unemployment rates such as South Africa, and also not for countries where recessions might occur (due to high interest rates).
The International Monetary Fund (IMF) in April reduced their January world economic growth forecast for 2022 from 4.4% to 3.6%. Their estimate for 2023 is also 3.6% and for 2024 it is 3.4%. This downgrade can be ascribed to a few factors, namely the negative impact of the war between Russia and the Ukraine, China’s severe lockdowns due to its zero-COVID policy, faster and more severe interest rate increases and fiscal policy measures to stabilise and reduce government debt.
The IMF expects global consumer price inflation (CPI) to average 7.4% in 2022, much higher than the 4.7% of 2021 - and estimates a return to pre-pandemic levels only by 2025. Inflation continued to surprise to the upside in April across the board mainly due to external factors, but in some countries domestic issues are also starting to add pressure to CPI.
Some of the factors causing higher than expected CPI are rising food and energy prices (due to oil, gas and food supply shortages emanating from among others Russia's invasion of Ukraine in an environment of strong global demand); ongoing supply-chain constraints (due to among others the zero-COVID policy in China); strong pent-up demand (after-effects of lockdowns); and the start of a wage-price spiral in some countries (due to tight labour markets).
Consequently, an increasing number of central banks are tightening monetary policy by for instance raising interest rates at a faster and more severe (50 basis points instead of 25) pace than originally intended. These actions increased “stagflation talk” in especially the United States as fears of a recession in a high inflationary environment grows.
In the US, the Fed is expected to raise rates by 50 basis points in both June and July, while the European Central Bank stated that net purchases of bonds will end in Q3 2022, whereafter interest rate increases will occur at a gradual pace. However, Japan is at this stage more concerned about weaker growth than inflation and tighter monetary policy is not expected (to the same degree as other countries).
In South Africa, the South African Reserve Bank raised the repo rate by 50 basis points – as expected. This more severe rate hike (previous three increases in November, January and March were 25 basis points each) is intended to reduce the increase in second-round inflation. Such lower second-round inflation includes a smaller pass-through from high fuel prices to a wide range of retail prices, lower inflation expectations and lower wage demands. If left unattended, second-round inflation factors may all contribute to much higher inflation and interest rates.
Multivest Economic Division