The table below provides a review of key domestic and international investment indicators for the past quarter, as well as over longer periods.

South African asset classes (in rands)

(Performance over periods to 30 June 2022)  

Global asset classes (in dollars)

(Performance over periods to 30 June 2022)

Currencies 

(Performance over periods to 30 June 2022) 

* Updated annually from 1900, or longest available period
Returns for periods longer than 12 months are annualised.

INTERNATIONAL MARKET COMMENTARY 

Markets took their cue from the start of the year in Q2 to repeat much of the weakness seen in the early months. Many of the concerns that pervaded investor sentiment in Q1 only persisted or worsened, making for particularly challenging conditions: high inflation (at levels not seen in western economies for a generation) and tight labour markets coming up against rising interest rates and stalling economic growth. 

The big economic story has been inflation. At already elevated levels, any hopes of more transitory pressures were quashed as high energy costs, rising wages and broader input prices took hold. Coupled with supply side shocks in the form of localised China lockdowns (thanks to a zero COVID approach and questionable vaccination program) and of course the continued impact of the Russian invasion of Ukraine, and the stage has been set for significant inflationary concerns. 

Inflation at current levels has not been seen in most developed economies for a generation and the wall of worry (outside of the immediate hike in living costs) for markets has focused on central bank response. It would be fair to say that this has dominated thinking. Not will rates climb, but how high and how fast? And it has to be noted that a sensitive touch of the controls is required. Too aggressive and you run the risk of smothering growth and forcing a recession. Too little and inflation could become entrenched and central banks lose credibility. Forget a ‘goldilocks’ economy, central banks have become ‘Goldilocks’ looking to get their response just right. Not too much and not too little. 

This has been the story of the quarter with markets oscillating between optimism that central banks have inflation under control, to concern that a recession is looming. So to start with the bad news: it has been a very challenging quarter for risk assets. Equity markets sold off with the US leading the way, falling 16.9% on the quarter (the worst quarter since the global financial crisis), building on the losses seen in Q1 to end the half year down 21.3%. The biggest H1 decline for 60 years. 

Market weakness was reflected globally with Europe (ex UK) down 8,7% in Q2 (much of it in the last month) and emerging markets down 8,1%. Only the UK stood out, with a more moderate loss of 2.9%, reflecting the more ‘value based’ constituents of the main index. With this in mind it was the ‘growth’ heavy segments of the markets that fared worst with the likes of Information Technology down 21.6% on the quarter, Communication Services off 18.1% and Consumer Discretionary down 20.2%. Contrast this with Consumer Staples, down 6% and Utilities 6.6%, and the picture is set for the direction of investor thinking over the quarter. In fact this is summed up perfectly by the performance of ‘Growth Stocks’ as a style during the first half of the year, down 27.8%, with ‘Value Stocks’ down 12% over the same period. A huge variation in performance. 

Losses were not confined to traditional ‘risk’ assets with notable swings in fixed income markets as investors grappled with a changing landscape of base-rate expectations. Without exception fixed income markets suffered, with default sensitive areas such as high yield and emerging markets seeing the worst of it (down 10% and 10.5% respectively) as well as longer dated securities that are more sensitive to base-rate rises such as index-linked bonds (down 17.5% for UK Index Linked). There really hasn’t been much of a traditional ‘flight to safety’ with only the US Dollar seeing real strength over the quarter (against every major currency) along with a handful of selective areas that can offer a degree of inflation protection or have unique exposure to the current environment (energy for example). 

If you’re interested, Bitcoin was down a staggering 59% over the quarter. 

But it hasn’t all been bad news. Challenging? Yes, but there are signs that inflation may be coming under control. Growth has dipped and investor sentiment has deteriorated but this could turn sharply if we see more evidence of inflationary control which in turn could impact base-rate expectations. Elevated inflation when inflation is still rising does nothing for sentiment, but elevated inflation when inflation is falling is very different. In other words we do not need to see inflation back at around 2.5% for things to feel very different. And so much negativity is now priced into markets.

DOMESTIC MARKET COMMENTARY

First quarter GDP printed at 1,9%, exceeding market expectations, with the economy now back at pre-Covid 19 levels. The expansion was broad based, with strong contributions from the manufacturing and trade sector, and robust consumer spending as the economy reopened. This provides a good starting point for the year and will help offset what looks set to be a tougher second quarter, with weak prints for mining and manufacturing production in April confirming the disruption and damage from the flooding in KwaZulu Natal, strikes in the mining sector and persistent loadshedding. Local PMI data for May, however, suggests a lingering impact but also recovery post the natural disaster. A record decline in business confidence for the second quarter echoed the above pain points. 

Loadshedding at Eskom worsened in June, in part due to industrial action amid tense wage negotiations. More constructively, the SOE announced 18 winning bids for renewable projects in Mpumalanga, which will lease land from Eskom and generate an estimated 1800MW of energy to be wheeled across the grid. While this will not alleviate the immediate energy crisis, it is illustrative of the energy reforms slowly being enacted. 

Headline inflation surprised to the upside at 6,5% y-o-y in May, a breach of the 6% upper target of the SA Reserve Bank and the highest figure since 2017. While food and fuel remain meaningful drivers, food prices were a key source of the upside surprise. Producer price inflation again exceeded market expectations with a 14,7% increase over the year. 

Global market volatility weighed on the local bond market and the currency with the FTSE All Bond Index declining 3,7% over the quarter. Despite a quarterly depreciation of approximately 11,4% against the US dollar, the rand proved more resilient year to date, depreciating by approximately 1,7%. Local equity markets lost ground over the quarter with the FTSE/JSE All Share down 11,7%. Outside of industrials, most sectors were down in June with notable weakness in the last month from resources, with a downdraft of 17,2%. The big news in June was corporate activity from Prosus and Naspers, which will see the company sell part of their stake in Tencent to fund a buyback of company shares to narrow the discount to net asset value and unlock value for shareholders. This helped Naspers and Prosus gain 42,3% and 32,6% over the quarter respectively.

DISCLAIMER

Nedgroup Collective Investments (RF) Proprietary Limited is an authorised Collective Investment Scheme and the representative of Nedgroup Investments Funds PLC in terms of the Collective Investment Schemes Control Act. It is a member of the Association of Savings & Investment South Africa (ASISA). Collective Investment Schemes are generally medium to long-term investments. The value of your investment may go down as well as up. Past performance is not necessarily a guide to future performance. Nedgroup Investments does not guarantee the performance of your investment and even if forecasts about the expected future performance are included you will carry the investment and market risk, which includes the possibility of losing capital. Our funds are traded at ruling prices and can engage in borrowing and scrip lending. Certain funds may be subject to currency fluctuations due to its international exposure. Nedgroup Investments has the right to close funds to new investors in order to manage it more efficiently.   A fund of funds may only invest in other funds, and a feeder fund may only invest in another single fund, both will have funds that levy their own charges, which could result in a higher fee structure.  A schedule of fees, charges and maximum commissions is available on request from Nedgroup Investments.

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