Economic and Market Overview: Quarter 2, 2021

Economic and Market Overview: Quarter 1, 2021

Global Markets

Global risk appetite kicked off the month on a positive note, supported by fewer lockdown restrictions in the US, UK, and Europe, as well as robust global trade activity. This can be further evidenced in in still-elevated PMI readings. This changed quite quickly mid-month following the June FOMC statement, updated forecasts, and the post-meeting press briefing. Risk appetite moderated and volatility rose, most notably in EM Forex and fixed income markets. The market’s interpretation of the June FOMC meeting was that it underwent a “hawkish pivot”. The 2023 median dot jumped from no hikes to two hikes while the Q&A session confirmed that the Fed was “talking about talking about tapering”.

What also surfaced was that it has become less certain on the transitory nature of the current inflation surge. The quarter has been characterized by debate as to whether inflation is going to be transitory or not. One of the fundamental concerns is that short-term supply-driven inflation will lead to long-term stagflation because of overly stimulatory monetary and fiscal policy amid excessively high debt levels. It is important however to note that markets are not yet pricing in such an inflation scenario. US nominal and real yields remain low, breakeven inflation has narrowed somewhat, and equity markets have risen on solid earnings rebound.

Global equities (MSCI ACWI) returned 7.4% for the quarter, with emerging markets lagging developed markets at 5.0% and 7.7%, respectively. For SA investors, the ZAR’s 3.3% appreciation against the US dollar would have diluted global investment returns. Global bonds delivered 1.3% for the quarter, regaining some of the losses recorded in Q1. Global property posted another quarter of good gains with a 9.7% return. Spurred by the improving growth outlook, US equity markets continued to rally for the quarter (although June gains were more subdued), with the S&P 500 delivering an 8.5% return, the Dow Jones 5.1%, and the technology-heavy Nasdaq 11.4%.

In China, GDP growth slowed to 0.6% quarter on quarter in Q1 2021 from 3.2% the previous quarter. The People’s Bank of China again left its lending rates on hold in June, while noting in its Q1 monetary report that it was more worried about an uneven economic recovery, weak consumer spending and lack of private business investment than rising prices. The government continued its crackdown on the large local IT and fintech companies, introducing more regulations regarding financing and microlending in a bid to curb “monopolistic” practices online. For Q2 of 2021, Japan’s Nikkei returned -1.6%, the MSCI China produced 2.3% and Hong Kong’s Hang Seng delivered 2.9% (all in USD).

Domestic Markets

Towards the end of the month Covid jitters increased amid the broadening prevalence of the Delta variant. This more contagious version of the Covid-19 virus has come at a time when the vaccine rollout in the developed world has lost pace, with levels still short of ensuring herd immunity. Emerging markets are notably worse off, with many of the middle to lower income countries having vaccinated less than 10% of their populations. SA is case in point where the vaccine rollout has been disappointing, reflecting distributional capacity constraints, rather than limitations on supply or funding. Encouragingly, registrations for younger sections of the population will open early in 2H21 and surveys of the willingness to vaccinate are surprisingly high.

While SA has moved to lockdown level 4 amid the rampant spread of the Delta variant, particularly in Gauteng, the economy continues to benefit from the cyclical breather provided by the positive terms of trade. GDP and the current account beat expectations for Q1 2021 and tax revenues continue to recover. Following the better-than-expected data, consensus forecasts for 2021 GDP growth has climbed to above 4.0% and the budget deficit is projected to be comfortably below 8% of GDP. At this stage, the impact on productive sectors should be minimal, with the damage focused on the hospitality (restaurants), entertainment, and alcoholic beverage industries. This poses modest downside risk to Q3 GDP growth, depending on the duration of restrictions. The commodity boom has been a tailwind for commodity producers like South Africa, adding to a faster-than expected domestic economic recovery. The multiplier effects of our buoyant resources and agricultural sectors, together with higher taxes from mining companies have supported the South African cyclical recovery. This has taken some pressure off our constrained fiscal position.

There were also a number of incidents that have given hope that some much-needed structural reforms are indeed being taken. The announcement that private companies will be able to produce up to 100MW of power is a significant step towards mitigating the devastating effects of load shedding and reducing the national reliance on Eskom. The 51% sale of SAA, although riddled with questions around indirect government funding, nonetheless is a step towards eliminating one of several fiscally draining SOEs from receiving unlimited state bailouts. The net tightening around corruption-accused persons, with some action being taken towards bringing these persons to book, such as the suspension of ANC Secretary General Ace Magashule, and Health Minister Zweli Mkhize placed on special leave, as well as further steps towards extraditing the notorious Gupta brothers from the UAE is indeed encouraging.

The ALSI was roughly flat for the second quarter, returning 0.05%, while the Capped SWIX Index returned 0.6%. The standout sector was Listed Property with an 11.1% total return. Financials delivered 7.5%, Industrials a pedestrian 0.8% and the Resources sector -5.0%. This performance reflected the value still seen in “SA Inc” counters, which have lagged during the recovery, and the growing view that Resources shares may be reaching the end of their bull run. SA bonds (Albi) posted a strong 6.9% return, remaining sought after sources of yield for global investors compared to many other sovereign bonds. SA bonds continue to outperform SA cash due to our cash rates still being at multi decade lows.

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