Seasoned investors have witnessed a range of events that have surprised over the years – pandemics, natural disasters, political upheavals, wars, terrorism, financial crises… and more recently unexpected, decades-high inflation in many of the world’s largest economies. Most of these events have had a devasting effect on financial markets.
In the modern era, no country is an island and one needn’t look further than the (unexpected) regional conflict in Ukraine, which has affected everyone across the globe by disrupting supply chains – especially food and energy – thereby spurring global inflation.
Disaster always reverberates unevenly, across both countries and people, and those countries that are suffering most from the Ukraine fallout – poorer African countries, for example, are certainly not those that caused it.
But the unexpected can also be positive: From an investment perspective, this week was characterised by a surprise upward revision of sales projections by leading US retailers such as Macy’s and Dollar Tree, with those companies’ share prices notching their biggest rallies on record, something that was not expected in a high inflation environment.
For Dynasty investors, our “quality” bias to fund selection has unexpectedly underperformed on a relative basis thus far in 2022, despite the earnings growth projections of the underlying companies having remained robust. An unexpected positive development for our investors may be a quicker than anticipated pace in the moderation of global inflation, leading to a less aggressive rate hike cycle. We believe this will result in a swift and sharp rebound in growth stocks, benefitting a number of our quality holdings.
“You get recession, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”
– Peter Lynch, American investor
- Under siege, Ukraine is looking at how to move grain and vegetable oils out of the country, which will involve breaking a month-long blockade of the Sea of Azov and the Black Sea by the Russian navy and moving more by land. The war and Western sanctions against agitator Russia have seen drastic inflation in the cost of grain, cooking oil, fertilizer, and energy which are threatening a global food crisis.
- This comes as Russian forces shelled more than 40 towns in Ukraine’s eastern Donbas region, threatening to shut off the last main escape route for civilians trapped in the path of the invasion, which is now in its fourth month.
- In China, capital Beijing has further tightened its endeavours to curtail Covid-19 with its target of zero community transmission. It is punishing workplaces that flout rules or circumvent curbs, imploring residents to police their own movements. Exports from Shanghai, the world’s largest container port, dived 44% last month from a year earlier and imports fell by a third.
- The most recent Federal Reserve meeting’s minutes did not tell economists anything they did not already know. The Fed is set to raise rates by 0.5 percentage points at the June and July meetings. The minutes are consistent with a range of policy options thereafter, but a slower pace of tightening seems the most likely course.
- Good news for consumers in the UK is on the cards, as chancellor Rishi Sunak is to announce a windfall profit tax on oil companies. This will aid consumers facing higher energy bills. Windfall taxes are likely to be a growing global policy tool in many sectors.
- New Zealand’s central bank is the latest to hike interest rates 50 basis points. As a result, markets remain concerned about the world’s economic outlook, with hawkish rhetoric from central banks raising concern that an aggressive fight against inflation would push many countries into recession.
- Zimbabwe’s May inflation rate jumped back into triple digits after the central bank effectively devalued the local currency by introducing a new interbank rate at which most commerce will take place. Annual inflation quickened to 131.7% from 96.4% in April, ending a ten-month period during which the rate was below 100%. Zimbabwe’s inflation situation does not seem to be linked to global ills but is rather an outcome of its monetary policy.
- After falling 15% this year, the S&P 500 is trading at around 4 100. According to analysts tracked by Bloomberg, its members will earn a combined $248 a share next year. Divide price by earnings and the result is a forward multiple of 16 – roughly in line with the three-decade average. Not cheap, but perhaps reasonably priced.
- At the time of writing, the S&P was up 5.6% for the week.
- Writing for Daily Maverick, Stephen Grootes states that although President Cyril Ramaphosa still appears to be the dominant political figure in the country, certain dynamics and personalities exemplify the limits of his power – such a person may be Transport Minister Fikile Mbalula. This comes ahead of the ANC’s national elective conference in December.
- Earlier this week, Ramaphosa said “bystander countries” were suffering due to sanctions against Russia and called for talks as the African Union prepared a mission to foster dialogue between Moscow and Kyiv. Senegal’s President Macky Sall – the current chair of Africa’s top political bloc, the AU – is preparing to visit Kyiv and Moscow in an attempt to foster peace.
- South Africa’s producer inflation, a forerunner of consumer inflation, surged to a record high in April, beating analysts’ forecasts. The 13.1% gain, from 11.9% in March, is likely to further sour manufacturing mood and is the highest rate since the start of 2013.
- Consumers are hoping for relief at the fuel pumps next month after government said it is giving special attention to the fuel price – which is expected to rise sharply in June – as a temporary reduction of the general fuel levy is set to end. According to the latest data from the Central Energy Fund, the price for 95 octane unleaded petrol is expected to increase by R2.38 per litre on 1 June, 93 octane unleaded petrol will rise by R2.28 per litre, and diesel by between R1.08 and R1.12 per litre. Every litre of fuel carries a surcharge of 33% in pure taxes and levies.
- Speaking on South Africa’s deplorable infrastructure, Kenny Fihla, CEO of Standard Bank Corporate and Investment Banking, has said South Africa lacks the institutional capacity critical to fixing infrastructure, which is seen as vital to unlocking the country’s economic potential. He has urged government to partner with the private sector to address the challenge.
- Meanwhile, the United Nations Development Programme in South Africa is set to ensure that funds for the KwaZulu-Natal floods are used appropriately after reallocating R21 million of its budget for flood relief. The body provided the cash to help victims of the natural disaster in the province and said it will work with NGOs and local communities.
- There is a full-blown stay-away at South Africa’s tax custodian, with both the Public Servants Association and the National Education Health and Allied Workers Union kicking off a strike at the South African Revenue Service which had, at the last minute, offered to channel its savings from last year towards salaries.
- One of the world’s leading platinum producers, Anglo American Platinum, has signed a five-year, inflation-beating wage agreement with three labour unions that will probably set the benchmark in pay talks with other producers. The agreement means the lowest-paid employees will receive monthly increases of 7.5% (or R1 100) in the first year, rising to R1 500 (or 7.5%) in year five.
- Today, the JSE was tracking its global peers higher as stocks extended the previous session’s gains after weeks of pressure. Sentiment has improved in the wake of US Federal Reserve minutes from its last meeting, which have indicated the possibility of a pause in its interest-rate hiking cycle later in 2022.
- At the time of writing, the JSE ALSI was up 4.27% for the week, with the rand 1.7% stronger against the US dollar.
Sources: Dynasty, Bloomberg, BusinessLive, Reuters, Daily Maverick, News24, UBS, etc.