Economic and Market Overview: Quarter 3, 2021

Global Markets

In the US, the economy grew at a robust 6.7% (quarter on quarter annualised) in Q2 2021, fuelled by further recoveries in manufacturing, services and consumer spending. On the back of an acceleration in inflation and improving employment data, the US Fed signalled that its long-standing easy monetary policy was set to be tapered. There is the expectation that fewer assets will be purchased in the fourth quarter and to start hiking interest rates gradually in 2023. This timing was somewhat sooner than expected by the market and weighed on US Treasuries and the equity market. It also resulted in some analysts scaling back their growth estimates. Both the Bank of England and the European Central Bank followed the US Fed’s tighter policy forecast in September, although their monetary tightening is expected to be less aggressive.

US equities delivered mixed returns for the quarter, with the main losses occurring in September as sentiment deteriorated. The S&P 500 had a return of 0.6%, while the technology-heavy Nasdaq lost 0.2%. The MSCI All Country World Index returned -1.1% for the quarter, with emerging markets lagging developed markets with a return of -8.1% in USD. For SA investors, the Rand’s depreciation against the USD added to global investment returns. Global bonds delivered -0.9% for the quarter on fears of a quicker end to easy global monetary policies as growth improved and inflation fears rose. For the quarter, all the major European equity indices ended in the red, with the FTSE 100 losing -0.5%, while the CAC 40 declined -1.8%, and Germany’s DAX declined -4.0% (all in USD). Global property also had a negative return of -0.3% in USD. Broader concerns regarding the indebtedness of the Chinese property market and the potential spill-over effect into other regions impacted the asset class negatively. In addition, interest rate and inflation concerns hit the sector.

Japan’s economy recorded positive growth, with a 0.5% (quarter on quarter annualised) GDP growth in Q2 compared to -1.1% in Q1. Consumer spending, private investment and government spending all contributed to the turnaround, but the world’s third-largest economy is still lagging in its recovery compared to other countries. In China, the economy grew at 1.3% (quarter on quarter annualised) in Q2, slightly above the 1.2% consensus. However, towards the back end of the quarter, there were increasing indications that this growth was losing momentum, compounded by further concerns over the negative impact on growth due to the government’s regulatory crackdown. This was further impacted by the possibility of a liquidity crisis prompted by troubles at Evergrande, China’s second-largest private property developer. This also resulted in the selling of global resource stocks. At the same time, uncertainty over Evergrande continued as the government did not assure lenders that it would assume its debt.

Domestic Markets

Economic growth for Q2 2021 surprised on the upside at 1.2% (quarter on quarter annualised) compared to the consensus of 0.7%, and up from the revised 1.0% recorded in the previous quarter. This amounted to 19.3% year on year growth due to the low base of the previous year. Growth was uneven across sectors, with transport, agriculture and services posting the strongest performances, while manufacturing contracted. However, the domestic news was dominated by the July riots sparked after the jailing of Jacob Zuma. National Treasury estimated the resulting damage could subtract around 0.9% from 2021 GDP growth. Growth prospects were also hit by the higher lockdown levels imposed as a result of the third wave of the coronavirus pandemic during the quarter, which came despite the continued rollout of the government’s vaccine program. The abating of the wave towards the quarter-end was a positive sign that vaccinations were making progress in combatting the Delta variant of the virus. This also paved the way for a further reopening of the economy.

On the domestic front, the broader equity market was only marginally negative (in Rand terms) over the quarter. The All Share Index lost 0.8%, while the Capped SWIX managed a positive return of 3.2%. Good gains in retail and property stocks helped to largely offset losses in some resource shares, as well as Naspers and Prosus. Naspers and Prosus in particular were hit due to the regulatory crackdown of the Chinese government. The standout sector was financials, which delivered a 13.2% return, followed by listed property (the ALPI) with a 6.5% return. The resources sector retraced some of its previous strong performance with a -3.8% return amid growing concerns over a Chinese economic slowdown, while the industrial sector was partially impacted by its Naspers and Prosus exposure, posting a -4.3% total return. Major news flow included the buyout of Liberty by Standard Bank, as well as the announcement of a restructuring transaction by RMI. Aspen delivered strong returns for the quarter, rising 69%, bringing the 12-month return for the counter to 130%.

At its September MPC meeting, the South African Reserve Bank kept its benchmark interest rate unchanged at a record low of 3.5%, but sounded more hawkish as it indicated that its first 25bp hike would be coming in the last quarter of the year, as well as further 25bp increases in each quarter of 2022 and 2023. Positive news came in the form of a record-breaking trade surplus on the back of the rise in commodity prices earlier in the quarter, in turn creating higher than expected tax receipts from mining companies.

At the same time, SA bonds bucked the global trend with positive returns, while the Rand lost ground against the major global currencies. SA bonds still managed to produce a return of 0.4% during the quarter, despite losing 2.1% in September as US Treasuries and global bonds recorded negative returns. Inflation-linked bonds had a return of 2.0% for the quarter, outperforming cash that had a return of 1.0% for the quarter.

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