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Multivest Market Watch - September 2022


Summary of views

Our growth signals are unchanged; they still suggest weaker growth into 1Q23. Specifically, our US recession model continues to suggest that US growth is set to slow further, with our US recession model signal rising as high as 75% in early 2023. We expect South Africa’s (SA’s) GDP to grow at 1,8% yoy in 2022 (down from 2,0% previously) and at 1,5% yoy in 2023 (down from 1,9% previously).

We expect at least another 150 basis points (bps) in SARB’s hiking cycle. We project a further 75 bps hike by SARB in November 2022, and 75 bps worth of hikes in early 2023, taking the terminal (end) repo rate to 7,75%. In terms of the balance of risks, we think the chance of a 100 bps hike in November is more likely than a 50 bps hike

Fiscal policy – ratios will be masked by an upward revision to nominal GDP. Our main budget deficit forecast is 5,2% of GDP in 2022/23, falling to 5,1% of GDP over the next two years (compared to 6%, 4,9% and 4,5%, respectively, in the February Budget). Despite potentially large expenditure overruns over the medium term, nominal GDP is significantly understated in the Budget and would be revised up, masking the deterioration in the budget deficit.

Currency – look for an overshoot towards the 19,00 level for the USDZAR. When global financial conditions tighten and growth comes under pressure, as is now the case, EM currencies are on the back foot. During previous periods of financial market stress and a sharp slowdown in global growth (in 2001, 2008, 2015 and 2020), rand weakness extended well beyond its fair-value range before staging some recovery

Fixed income: bonds will struggle while central bank hikes. On a tactical three- to six-month view, we believe it may be too early to get bullish on bonds. Much of the fiscal upside seems priced into yields already, and any inflation respite may be limited into year-end even if the July print was peak inflation.

Listed property – operational improvements, but too early to get excited. The latest earnings releases are providing some confirmation for the rally we saw in 2021, albeit off a low base. Key trends we highlight are (1) overall vacancy rates are reducing, (2) property valuations are holding steady and (3) reversions, while negative, are showing some improvement. Within our coverage, we have Overweight recommendations on MAS Real Estate, NEPI Rockcastle, Growthpoint and Redefine at current levels.

Gold sector – opportunity comes when least expected. The latest results season was mixed. The outlook is also mixed. Most companies are guiding for an improved operational performance; this, coupled with a weaker rand and local currencies, should support earnings and cashflow. However, a higher capex and cash cost outlook could erode some of this upside. We continue to rate the sector Neutral, but we believe some of the gold stocks are starting to look interesting.

PGM sector – in for a bumpy ride. We are largely sticking to calls and are still calling for a correction in the basket to normalised levels over the next few years, albeit at slightly higher levels than before, after factoring in the impact of inflation on future PGM prices. We continue to rate the sector Neutral.

Telecommunications and media: Naspers and Prosus open-ended buyback programme priced in. Rational and appropriate steps being taken in a volatile macro/tech rating environment; open-ended buyback supports near-term PRX/NPN outperformance relative to Tencent (economically and from a sentiment perspective), in our view. Overall, we view the PRX/NPN results and revised strategic guidance as appropriate and rational given the challenging cycle.

Healthcare – overestimated impact of cost inflation. The SA hospitals have been oversold in the past three months. We believe the market is pricing in high-cost inflation and underestimating the recovery in occupancy rates back to pre-pandemic levels. We disagree with this. At current valuation levels, we see upside in the hospital stocks.


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 - September 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 Looming battle: Increasing interest rates vs OPEC production cuts


Large parts of the world economy are due to enter recessionary territory in the fourth quarter of 2022. Uncertainty, however, remains on how long this recession will last. Much of the uncertainty stems from a new threat, namely OPEC+’s inclination to cut oil production - to drive up oil prices, which may force central banks to keep interest higher for longer. However, the event which roiled financial markets was an “extraordinary energy package” in the UK – which forced the government to reverse course.


In the US the economy contracted by 0.6% in Q2 2022, following a contraction in Q1 2022. Weakness is due to continue, not least due to another 75-basis point increase in interest rates. The Federal Reserve has since March 2022 increased the Federal Funds rate by 300 basis point to 3% - 3.25%. However, the Fed is still regarded as “behind the curve”, meaning monetary policy is still accommodative and stimulatory, given consumer price inflation of 8.3% in August and a low unemployment rate of 3.7%. Current indications from the Taylor rule suggest the terminal rate may be 5.5%, but it may even be higher. And there is a lot of uncertainty on just when a terminal rate will be reached, and how data dependent and patient the Fed will be with high inflation.


However, as central bankers around the world raise interest rates to slow demand in an attempt to reduce the pace at which inflation increases, OPEC+ (OPEC and non-OPEC oil producers, including Russia), is set to continue with production cuts. Depending on the size of production cuts, the price of oil may well rocket back to above $100 per barrel – and renew pressure on inflation to increase, which may force central banks to raise interest rates to real high levels and keep it there for a prolonged period, which may force OPEC to cut production again. And so the cycle may continue until a compromise is reached.


Should this cycle continue for a prolonged period, social unrests may take on violent forms. Indeed, the Civil Unrest Index showed 101 countries witnessed an increase in civil unrest in Q3 2022. This is bound to impact political stability as citizens protest against increases in the cost of living, high electricity and fuel prices and the shortage of energy products.


The UK’ energy support package attempts to alleviate the cost-of-living crisis caused by the energy shortages. The plan, among others, aims to cap annual energy bills at £2 500. This means it can rise from the current £1 971 to £2 500, but it will be lower than the expected peak of more than £6 000 next year. Inflation may thus peak at 11% in Q4 2022 instead of the anticipated 16% in Q2 2023. Furthermore, the government proposed to cut the 45% personal income tax bracket to 40%, which caused an uproar as the “poor” will subsidise the ”rich”. This proposal was withdrawn following the outcry. However, financial markets did not react well to the proposals. Investors worried that a fiscal expansion will cause inflationary pressure, while the central bank attempted to reduce it. The concern is also that increased government borrowing to fund the package will tighten credit market conditions. Consequently, British bond yields surged, while British share prices fell. At 3.77% the 10-year bond yield hit the highest level since 2011 (1.85% in July), while the pound depreciated to US$1.11, the lowest since 1985.


In South Africa load shedding continued unabated as some power stations were sabotaged, while others failed. In the meantime, the Reserve Bank raised the repo rate by another 75 basis points as inflation seem to have peaked – for now. Another rate increase of at least 50 basis points is expected in November. The rate increase, however, was not enough to stem the rand’s depreciation, as the international markets are now in full “risk-off” mode, ridding themselves of “risky” assets. This will continue until clarity is gained as to when the world recession may end and when interest rates may start on a declining trend.


Multivest Economic Division


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