Central Banks reacted differently to rising CPI
Product shortages and high oil prices raise global inflation rates further
New COVID-19 variant threatens to reduce global growth estimates
MONETARY POLICY DYNAMICS: GLOBAL
Advanced-economy central banks turn more hawkish while EMs continue hiking
Fed mulls an earlier end to its QE programme and an earlier start to its hiking cycle
SA’S REAL ECONOMY
Load shedding and COVID-19-related restrictions pose downside risk to SA’s growth
SA INFLATION TRENDS
Higher fuel costs put upward pressure on headline CPI in November and December
MONETARY POLICY DYNAMICS: SA
Upside inflation risks saw SARB initiating its hiking cycle in November
CREDIT RISK COMPARISON
Credit rating agencies warn of credit-negative headwinds over the medium run
SA’S BOND MARKET
SAGB yield curve bull-steepens in November
THE RAND AND KEY RISKS
USDZAR fair-value range unchanged, but a more hawkish Fed could keep the rand weak
THE RAND AND KEY RISKS
EM FX continues to weaken as USD support persists amid a hawkish Fed
EQUITIES & COMMODITIES
Equity indices slump in response to a hawkish Fed and Omicron discovery
Equity markets fell sharply from mid-November as reality set in that inflation may not be transitory and that the Fed may react to this by ending its QE programme earlier than forecast and begin raising interest rates thereafter. Towards month-end, the discovery of a new COVID-19 variant sent markets even lower as investors watched countries impose travel restrictions and global growth risks were set squarely to the downside.
The FTSE 100 was the biggest loser among the major equity indices, declining 7,5% during the month, followed by the Euro Stoxx 50, which was down 7,4% (both in USD terms).
The Nikkei 225 lost 5,3% while the MSCI EM index shed 4,1% during the month. However, the JSE All Share Index bucked the trend, albeit marginally, rising 0,4% in USD terms and supported by rand-hedge stocks amid a sharp depreciation in the rand.
Looking at commodity price performance during the month, Brent fell sharply in November with global demand threatened due to the spread of the virus and related lockdown restrictions risk hampering economic activity. Brent declined 16,4% in November, the sharpest monthly decline since the start of the pandemic in March 2020. OPEC is projecting an oversupply of oil in 1Q22 as demand for oil subsides.
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 5,1%, while the 2022 estimate is 2,0%. Further details on the downward revisions to growth will be provided in our Quarterly Outlook report. Inflation: In the final two months of the year, we expect a sharper rise in headline CPI, driven predominantly by fuel costs, but also supported by higher prices of discretionary goods and services. In November, the local petrol price went up by 6,6% m/m (and 34% yoy). In December, the fuel price has risen by a further 3.8% m/m, taking the annualised inflation rate for petrol to 40.3% yoy. This will likely raise SA CPI to 5,4% and 5,6% yoy, respectively, in November and December 2021 (with an annual average of 4,5%). Our CPI forecast for 2022 remains unchanged at 4,3%, but the risk to this estimate is to the upside, particularly in light of the new COVID-19 variant and the resulting supply chain disruptions this may entail. Monetary policy: In line with our expectations, the SARB MPC raised the repo rate by 25 bps to 3,75%. We maintain our forecast for a cumulative 100 bps increase to the repo rate by the end of 2022, taking the repo rate to 4,5%, compared to a more hawkish QPM reflecting hikes of 167 bps instead. We believe SARB may continue with its gradual rate hike path by raising the repo rate again in 1Q22 as it seeks to anchor inflation and inflation expectations around the mid-point of its target range. Fixed income: The SAGB yield curve bull-steepened in November, with front-end yields sharply lower as the market digested SARB’s recent rate hike in the context of further gradual interest rate increases expected. The combination of a more hawkish MPC and improved fiscal outlook will likely raise short-end yields and reduce long-end bond yields to offer a flattening bias to the yield curve in the near term. 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 range for the R2030 rises to 9,00-9,50% (previously 8,50-9,00%), with a point target of 9,22% (previously 8,70%). We adjust our fair-value range for the R2048 50 bps higher to 10,50-11,00%. Currency: We do see the rand’s sharp depreciation in November as an overshoot, as opposed to a fundamental shift in the currency’s fair value. We have already seen in the past week fears about inflation in general and central banks that will tighten policy sooner rather than later adversely effecting EM currencies including the rand. As a result, we will continue to be better buyers of USD when the USDZAR falls below our neutral range of 14,80-15,50.
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 - November 2021
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.
Multivest Economic Overview – November 2021
Although the international energy shortage highlighted last month (which contributed to elevated consumer price inflation - CPI) abated somewhat in November, CPI became more pronounced as a theme of future economic and market risk … until the Omicron variant of the COVID-19 was discovered and revealed by South Africa in the last week of November.
In typical knee-jerk fashion, prices on financial markets tumbled following uncertainty on whether the new variant will contribute to strict lockdowns and if new vaccines will be required. Also uncertain is the impact on CPI, responses by governments and central banks and supply chain disruptions. Moreover, economic growth is likely to be negatively impacted by the new variant. However, should governments not return to strict lockdowns, further supply chain disruptions may be avoided, contributing to CPI returning to “normal” in the US, UK and Europe by Q3 2022.
CPI increased to some of its highest ever year on year rates in the US, UK and Europe in October. In the US CPI was up 6.2% (5.4% in September), in the UK the RPI-rate rose to 6% (4.9%) and in the EU the HICP-rate increased by 4.1% (3.4%). Most of the increases thus far were driven by fiscal interventions stimulating demand, which exceeded supply of a number of goods disrupted by lockdowns. However, wages have risen faster than CPI in consumer facing industries such as restaurants – and these type of cost pressures are more likely to be permanent in nature.
Central Banks reacted differently to rising CPI. In the US the Federal Reserve tightened monetary policy by tapering their bond purchases. Treasury purchases will be reduced to $70 billion per month in November (from $80 billion) and the pace of Mortgage-Backed Securities (MBS) to $35 billion from $40 billion. Should the taper continue at a $15 billion monthly pace, the asset purchase programme will end in June 2022. However, Fed Chair, Jerome Powell, hinted that tapering may end sooner, while the term “transitory inflation” has come to an end. On interest rates, the Fed signalled it is not likely to raise rates until its employment target is reached, which may be in 2023. These announcements contributed to the Brent oil price dropping from $84 per barrel end October to below $70 at the end of November.
In the UK the Bank of England (BOE) left rates unchanged. The BOE’s governor, Andrew Bailey, said the vote to keep interest rates on hold was a “close call” and the BOE “won’t bottle it”, meaning rates will be increased if the economy develops in line with its forecast. So, it is likely interest rates may increase long before that in the US. However, similar to the US, the European Central Bank indicated that interest rates will not be raised hastily – more so as Europe is experienced high numbers of COVID-19 cases (before the new variant), especially in the more “unvaccinated” northern region.
China’s economic activity seems to have accelerated in October. Retail sales were up 4.9% in October (4.4% in September), industrial production was up 3.5% (3.1%), and production of electricity, power, gas and water increased by 11.1%. But, in China’s 70 largest cities, the average new home price was down 0.2% from the previous month.
Chances increased South Africa will experience low economic growth in Q4 on top of a contraction in Q3, mainly caused by the July looting and riots. The SARB estimates the economy shrank by 2.5% in Q3, while Stats SA announced Q3 employment decreased by 660 000 vs Q2, while the unemployment rate increased to 46.6%. Lower growth in Q4 will also emanate from load shedding, a 25-basis point increase in the repo rate, higher CPI (5% in October mainly caused by higher fuel prices), declining mineral prices affecting exports, as well as many countries cancelling flights to SA (affecting tourism) due to the discovery of the Omicron variant. However, growth will receive support from higher Black Friday sales.
Multivest Economic Division