INTERNATIONAL MARKET COMMENTARY
The third quarter of 2022 was a tale of two halves. The first half up to mid-August saw most asset classes rebound from Q2 lows with the MSCI world Index returning 4.1%. This was largely due to investors pricing in less aggressive rate hikes by the Federal Reserve due to slowing economic conditions and a peak inflation narrative. During the second half of Q3 the narrative changed dramatically as inflation continued to surprise to the upside whilst the labour market remained strong. Recession fears also mounted with hawkish central bankers voicing the need for further rate hikes to stop inflation. Controversial fiscal announcements in the United Kingdom caused havoc and a deteriorating energy and geopolitical environment in the greater euro area remained a big concern. Q3 was characterized by extreme volatility with investor sentiment reaching new lows. The VIX (Volatility Index) rose 22.2% in September month-on-month and is up 83% year-to-date.
In the US, the Federal Reserve increased interest rates by a third consecutive 75bp’s at their most recent meeting, resulting in a combined 150bps rate increase in Q3. This weighed on investor sentiment with Fed chair Jerome Powell noting that there would be more pain to come, as the Fed fights to bring down inflation. The Consumer Price Index slowed to 8.2% in September from 8.3% in August. This was above the market consensus of 8.1% as inflation remained persistent. The annual rate of growth by core prices however accelerated to a 40-year high of 6.6% from 6.3%. Meanwhile in Europe, the ECB continued its path of interest rate hikes with the European Central Bank also raising interest rates by an unprecedented 75bps in September as annual inflation in the Euro area jumped to 10.0% from 9.1% in August. This was the first time on record that inflation reached double-digits.
In the US the economy continued to slow in Q2 with the GDP contracting for a second consecutive quarter (referred to by many as a technical recession). GDP shrank 0.6% year-on-year in Q2 as consumer incomes and corporate profits were hit by higher debt costs and rising prices for food and energy, even though the latter came down during September. This was lower than the initial estimate of a 0.9% decline previously reported as consumption and inventories were revised higher. Meanwhile, Euro area growth expanded 0.8% year-on-year in Q2. This was the strongest expansion in three quarters driven by reduced COVID-19 restrictions and the summer season. The outlook however continues to look bleak for the Euro area due to strained supply chains, slowing growth in China and negative developments on the energy front.
US (benchmarked by the S&P 500) and European (STOXX 600 Index) indices posted losses for a third consecutive quarter for the first time since the Global Financial Crisis. The S&P 500 declined by 4.9% in Q3 while the tech heavy Nasdaq declined 3.9%. Rising rates and growth concerns continue to weigh on the markets with inflation remaining sticky whilst the labour market remained robust. The S&P 500 and Nasdaq 100 has recorded a -23.9% and -32.0% return year-to-date, respectively. The pan-European Stoxx 600 Index lost 4.3% during the quarter with the UK FTSE 100, France’s CAC 40 and the German DAX declining 2.7%, 5.2% and 2.5% respectively.
In the bond market, the US 10-year government bond yield rose meaningfully for a third-consecutive quarter, spiking to 3.8% by quarter end. The US 10-year bond yield has thus more than doubled from the 1.5% level where it started the year. Persistently high inflation and the hawkish Fed continued to push the yield higher. European sovereigns also lost ground and ended the quarter down 5.1%. Meanwhile a tumultuous week in the UK financial markets in September saw gilts book the worst performance in the quarter as they soared to 14-year highs before the Bank of England stepped in.
The Bloomberg Barclays Global Aggregate Bond Index ended Q3 6.9% lower. The total return for the bond Index in 2022 has been -21.3% so far, which for a safe-haven asset that is favored by conservative investors is, a painful result. The big question for global bond investors remains how high rates will go and how long they will stay there. Rates are now expected to reach 4.4% by December before rising to 4.6% in 2023.
The Japanese markets followed the other global equity markets lower in Q3 with the Bank of Japan (BOJ) maintaining its ultra-easy monetary policy during the quarter, leaving its policy rate unchanged at -0.1%. The economy expanded by 0.9% quarter-on-quarter in Q2 2022 followed by the lifting of all COVID-19 curbs. This was above the market consensus of a 0.7% increase. The BOJ however noted that the economy is expected to be under downward pressure from high commodity prices as a result of the prolonged war in Ukraine. The annual core CPI rose to 3.0% in September. This was the highest reading since September 2014, largely due to rising prices of food and raw materials as well as Yen weakness. The Nikkei 225 Average returned -0.8% for the quarter.
The Chinese markets continued to move lower during Q3 as economic activity came under pressure due to the government’s continued harsh crackdowns against COVID-19, with the country suffering its worst outbreak of the virus since the peak of the pandemic in early 2020. GDP growth for Q2 2022 disappointed at only 0.4% year on year compared to the 1.0% expected. Ongoing property market weakness also weighed on consumer and business sentiment. Due to this the People’s Bank of China (PBoC) left its benchmark lending rates unchanged in September after easing measures earlier in the quarter by 10bps to 2.75%. Further fiscal support measures were also announced by China’s State Council, totaling ¥1 trillion. The Yuan fell to a 13-year low against the surging US dollar in September with the ongoing monetary policy divergence between China and the US increasing the risk of further Yuan depreciation and capital outflows. On the bright side some of the support measures introduced by the government began to take hold towards quarter-end, as industrial production and fixed investment improved. Retail sales also rose in August beating consensus forecasts of a 3.5% increase with a 5.4% increase. The Chinese SSE Composite Index returned -11.0% during Q3 while the tech heavy Hang Seng Index produced a -20.2% return.
DOMESTIC MARKET COMMENTARY
The local economy was also negatively impacted by global events as a strong slowdown in the economic activity of most of our trading partners dampened growth prospects locally. On top of this the lasting impact of the devastating floods in KwaZulu-Natal and intense power outages during the quarter also negatively impacted economic growth. This was evident in the latest Q2 2022 GDP data released in September indicating that SA’s economy decreased by 0.7% quarter-on-quarter. On a more positive note, South Africa’s annual inflation eased to 7.5% in September from 7.6% in August edging further down from the 13-year high of 7.8% recorded in July. This matched the market expectations of a 7.5% rise. A steep fall in fuel prices at the start of August helped moderate cost pressures. The South African Reserve Bank (SARB) raised its benchmark repo rate by 75bps to 6.25% in September as widely expected, both to curb local price pressures and to ensure the interest rate differential between SA and the US did not become too wide, thereby protecting against rand weakness. The Rand breached R18/US$ for the first time since May 2020 while also losing ground to the euro and pound sterling. The Rand lost 9.2% versus the dollar, 3.6% against the Euro and 1.7% against the Pound Sterling during Q3.
SA markets closed lower during Q3 with all sectors of the equity market delivering negative returns. Nationwide load-shedding and growing concerns over a slowdown in global economic growth dampened investor sentiment. The FTSE-JSE Capped SWIX Index has however outperformed both EM and global equities YTD. The JSE tends to be less vulnerable than the larger developed market (DM) exchanges to a de-rating given the relatively lower valuations and earnings base. The FTSE-JSE Capped SWIX Index declined by 2.4% for the quarter and 7.0% year-to-date in Rands. The MSCI World Index and S&P 500 Index declined by 25.4% and 24.8% year-to-date (in USD), and 15.1% and 13.7% in Rands. On a sector level, locally oriented sectors such as financials ended Q3 with a -4.2% return and was the main source of weakness followed by better performance from the more globally orientated sectors such as industrials and resources who returned -1.5% and -2.2% during Q3 respectively. Listed property extended losses and ended Q3 down 3.5%. The top contributors and detractors for the FTSE JSE All Share Index during Q3 was Thungela resources and Absa Bank with a 71.0% and 18.4% return while Sasol and Capitec bank produced a -19.5% and -21.6%.
SA’s All Bond Index (ALBI) however managed to end the quarter marginally higher with a 0.6% increase. The ALBI was cushioned largely by its yields on both an absolute and relative level. Yields remained elevated during Q3 and saw pronounced volatility with the R2030 seeing low yields of 9.82% and high yields of 11.11% – a spread of 1.3% over the three months. Local bonds (ALBI) have managed to outperform global bonds on a year-to-date basis returning -1.3% versus -5.0%, in Rand terms. Cash, as measured by the STeFI Composite Index delivered a 1.4% return for Q3 while inflation-linked bonds returned -1.0%. Non-residents were net sellers yet again of SA bonds with a R21.9bn outflow in September notably higher than August’s R8.9bn. This brought the cumulative outflow for the last 12 months to R291.1bn.
Source: 2IP, I-Net Bridge, BER, RMB Global Markets, Bloomberg, Stanlib Asset Management, Schroders, Stats SA, M&G, Ninety-One