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Multivest Market Watch - October 2022

Summary of views

Growth: We expect South Africa’s (SA’s) GDP to grow at 1,8% yoy in 2022 and at 1,5% yoy in 2023. Risks to growth in 2023 are squarely to the downside as global growth slows and the domestic electricity supply constraint remains in place.

Inflation and monetary policy: We expect a continued but gradual decline in headline CPI falling back into the target range in June 2023. Core inflation is expected to move in the opposite direction to headline, driven by services inflation as services reprice periodically and is inherently labour-based, hence the lagged effect of current input costs and wage increases on service contracts. We continue to project an annual average inflation rate of 6.7% in 2022, 5.8% in 2023 and 4.8% in 2024. Upside risks to CPI will persist. The September print brought the quarterly average CPI rate to 7.6% in Q3, which is 20bps higher than the SARB’s current forecast. This will necessitate upward revisions to the SARB’s inflation estimates and assumptions at its upcoming November meeting, where we project a 75bps hike to the repo rate.

Fixed income: Tactically into Q1:23 we remain neutral on nominal bonds. Our expectations for a weaker currency, further monetary tightening and slower domestic growth remain in our view an environment where a more cautious stance towards bonds are warranted. As with the currency, we see current bond weakness as cyclical and as an overshoot of fair-value that we pin at 10.4% for the 10-year yield.

Currency: Our rand view remains unchanged - our updated model results suggest rand weakness could extend towards the 19,00. We see a move towards 19.00 as an overshoot of the rand’s fair-value that we currently pin at the 15,60-16,20 range.

Global developments

Broad-based global inflationary pressures rise after temporary relief in August

IMF revises growth forecasts lower in its October World Economic Outlook update

More central banks to reduce pace of hikes

Interest rate-hiking cycle more synchronised than ever before

SA’s real economy

SA growth weighed down by global developments and local load shedding

SA inflation trends

SA CPI is down but core is up –inflation in the economy is broadening

Monetary policy dynamics: SA

SARB hawks deliver a 75 bps hike

Credit risk comparison

Fiscal trajectory improved, but not confident that it has stabilised enough to warrant a rating review

SA’s bond market

SAGB yields mostly lower, bull steepening on the back of some positive developments in the MTBPS

The rand and key risks

Rand maintains weakening bias in October

The rand and key risks

EM FX performance mixed

Other markets

Equity markets rebound in October

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 - October 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.


Increases in Consumer Price Inflation now more broad-based

Supply shortages are causing broad based increases in world consumer price inflation (CPI), preventing it to slow at a faster pace. Nevertheless, as signs of slower world economic growth emerge, central banks may reduce the size of interest rate increases. Russia’s “economic strategy” is causing a “divide” in Europe, contributing to increased economic vulnerability in several countries. South Africa is due to register a smaller fiscal deficit in 2022/23, keeping rating agencies at bay, for now.

Examples of CPI remaining high, slowing at a snail’s pace and being broad-based can be found in the USA, Eurozone and UK’s September CPI and core CPI numbers. In the USA CPI was up 8.2% from a year earlier (y/y), slightly down from 8.3% in August. Excluding food and energy prices (core CPI) it was up 6.6% y/y. CPI in the Eurozone was 9.9% y/y, a record high. Core CPI was 4.8% y/y. The UK CPI remained at 10.1% y/y (a 40-year high), while core CPI was 6.5%. The energy price surge in especially the Eurozone is mostly related to the “Russian-engineered” shortage of natural gas. However, the problem is aggravated by insufficient “harbour infrastructure” as ships full of gas inventory are floating around harbours, waiting to off-load gas. These supply delays contribute to shortages and higher prices. Meanwhile the semi-conductor shortages persist, keeping car price increases high, while major airplane manufacturers are behind production targets, and in conjunction with a shortage in skilled pilots, contributed to airline ticket prices increasing 43% y/y in the USA. For CPI to react faster to interest rate increases, actions are needed to unclog these type of supply disruptions.

Nevertheless, signs are emerging that central banks may soon start to reduce the size of interest rate increases following fears of an economic recession. Although the European Central Bank (ECB) raised interest rates by another 75 basis points in October, the December increase could be 50 basis points, and the terminal rate may be 2.5% early next year. The Federal Reserve may continue increasing rates by 75 basis points though. But, with economic growth seen to slow markedly, the Fed may start considering rate increases of 50 basis points. Economic growth of 2.6% in Q3 2022 (quarterly annualised growth) is estimated to be followed by 0.7% in Q4 2022, while contractions early in 2023 is forecasted.

The aggressive rate increases in the USA thus far were not welcomed elsewhere as it contributed to a surging US$, contributing to sharp depreciations in other currencies, forcing them to also raise interest rates to prevent higher imported (especially energy) CPI, causing a higher risk of economic recessions and governments scrambling to soften the CPI blow with energy subsidies. However, Germany’s energy subsidy policies are creating division in Europe, precisely what Russia wanted through its “energy weaponizing” strategy. By borrowing another €200 billion Germany will spend way more on subsidies than any country, contributing to lower CPI - and being regarded as creditworthy, its borrowing costs will be low. However, less creditworthy countries will now be forced to provide energy subsidies, but their larger fiscal deficits will be financed by higher borrowing costs, creating higher interest rate differentials, making the ECB’s rate decisions difficult.

Likewise, South Africa’s exchange rate depreciated against the US$, while CPI is also not slowing very fast despite large reductions in fuel prices. CPI slowed to 7.5% y/y in September from 7.6% in August, but core CPI increased from 4.4% to 4.7%, also pointing to broad-based CPI taking hold. The Reserve Bank may continue with aggressive rate increases. Meanwhile, the minister of finance indicated a large windfall revenue overrun should cause a fiscal deficit of 4.9% of GDP compared to February’s expected 6% of GDP. Eskom will see a large chunk of its debt taken over by the government in 2023, while the R350 Social Relief of Distress grant will continue next year.

Multivest Economic Division

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