The first six months of the year were the stock market’s worst half since 1970, with the S&P 500 having declined by 21% year-to-date. Bonds, which are traditionally seen to provide more stable returns, have also had a torrid year – the ten-year Treasury note having fallen 10% in price. Indeed, it appears there has been nowhere to hide in 2022, even for investors with diversified portfolios across different asset classes.
The reasons for these declines are not new: The US Fed is determined to hike rates in its fight against 40-year high inflation, and there is widespread sentiment that this could tip the US into a recession.
However, there are views, such as those expressed by JP Morgan, that the annualised inflation rate could be cut in half over the next few months and that falling inflation would allow the central banks to pivot “and avoid producing an economic downturn”. The caveat is that the sharpness of this decline in inflation could only be driven by a ceasefire in the Ukraine, as the economic consequences of the war become fully realised for the west and for Russia. JP Morgan also anticipates global growth accelerating from 1.3% in the first half of this year to 3.1% in the second half.
Our own view, as expressed previously, is that market direction will remain data dependent, with the June US inflation number and Q2 corporate earnings releases being key determinants. Therefore, July will be pivotal for the future direction of markets for the balance of the year.
On a positive note, Credit Suisse told Bloomberg Television yesterday: “We’re going to have a double-digit return between now and the end of the year. We don’t have a profit problem as much as people say.”
Lastly, analysis by S&P Dow Jones Indices shows that historically, there has been little to no correlation between the index’s performance in the first and second half of the year.
“It is not that we think the world and economies are in great shape, but just that an average investor expects an economic disaster, and if that does not materialise, risky assets could recover most of their losses from the first half.”
– Marko Kolanovic, JP Morgan
Global News
- Not only does it appear the US is going to bypass a recession, but markets will experience a strong recovery according to JP Morgan. This is contrary to prevailing sentiment, which has kept markets at depressed levels. The bank is confident the annualised inflation rate will get cut in half in the second half of the year to 4.2%, allowing central banks to pivot and avoid producing an economic downturn.
- In fact, Capital Economics argues that recession fears are overblown. It says there is little sign of a pending downturn in incoming economic data. The strength of payroll employment growth, which is averaging close to 400 000 per month, is particularly hard to square with claims that a recession is imminent. Admittedly, with inflation rampant, that is likely to keep the US Federal Reserve raising interest rates aggressively, including another 75bp hike in July. But with underlying demand still strong, a slowdown in growth is still the more likely outcome.
- Conversely, Goldman Sachs has said that US profit margin estimates are too optimistic, which means stocks are at risk of more declines when Wall Street analysts downgrade their expectations. Other analysts have continued to be bullish about corporate earnings expectations, with net margin estimates for S&P 500 companies still at a record high.
- Stocks were the short-term beneficiary on Tuesday of news that China had softened its strict Covid protocols, which has eased investor concerns about global growth. China’s economy could grow by as much as 7.5% in the second half of the year, with such growth benefitting other emerging market economies.
- In Asia, central banks have been accumulating dollars to help defend their currencies during periods of wild market swings, learning from the 1997 crisis in that region. They are seeking to protect their currencies from weakening against a rising US dollar.
- Four months after Russia’s invasion of Ukraine toppled trade flows and sent futures soaring, fears of grain shortages are making way for optimism that key producers will reap harvests large enough to help replenish war-pinched reserves. This could see escalating food inflation being tamed, at least for now.
- Meanwhile, Russia is facing a large headache as its reliance on foreign software to run factories, farms and oil fields is becoming problematic. This as more IT providers pull out of the market in response to president Vladimir Putin’s invasion of Ukraine. International sanctions and tensions over the war have forced industrial companies to wind down operations in what was once one of their biggest markets.
- Amid the fray, the US has added five companies in China to a trade blacklist on Tuesday for allegedly supporting Russia’s military and defence industrial base. It has been flexing its muscle to enforce sanctions against Moscow over its invasion of Ukraine.
- In company news, Alphabet-owned Google’s cloud computing division plans to reveal the carbon footprint for its Workspace apps, including Gmail and Docs. It is building out its suite of tools to help customers assess their effect on the environment. This expands on measures unveiled in 2021 to measure and reduce the gross carbon emissions of using Google Cloud services.
- As of Thursday’s close, the S&P 500 was down 3.2% for the week.
Local News
- With the release of the final iteration of reports emanating from the Zondo Commission on State Capture, Daily Maverick has stated that the report found the ANC’s deployment policy is unconstitutional and illegal. Commission chairperson, now Chief Justice Raymond Zondo, stated there is no reason for the ANC’s deployment committee to exist. This is likely to give the ruling party a headache ahead of the national elective conference slated for December.
- Following the release of this report, DA chief whip Natasha Mazzone, has opened a case against the ANC over a raft of alleged criminal offences, including racketeering.
- Meanwhile, BusinessLive columnist Justice Malala, writes that the only thing left for the ANC to steal ahead of the December elective conference is an election. “As we saw from the state capture report, the ANC stole everywhere. Under a Zuma crony, it would now steal the one institution it needs to stay ‘legitimately’ in power. That’s the IEC.”
- Although total employment may have increased in South Africa, there is only a marginal increase in full-time jobs. Employment increased by 42 000 jobs, or 0.4%, from 10 062 000 in December 2021 to 10 104 000 in March 2022. The data shows that full-time employment continues to lag part-time employment, increasing by only 1 000 jobs between December 2021 and March 2022.
- As the country seeks to bring climbing inflation under control, the South African Reserve Bank may consider raising its benchmark interest rate by half a percentage point for a second consecutive meeting in July, according to a statement by governor Lesetja Kganyago. Inflation is currently at 6.5%. The baseline scenario is for rate increases of 25 basis points each at its next three meetings in 2022.
- South Africa entered stage six load-shedding during the week – following further unit failures and an illegal strike. Late on Tuesday, the National Union of Mineworkers and the National Union of Metalworkers of South Africa called on striking workers at Eskom to “normalise the situation”. Several workers have returned amid ongoing wage negotiations, with Eskom having offered a 7% increase which was rejected on Thursday as the unions said they would push for a double-digit increase. The crippling effect of power outages on the business sector caused the rand to fall sharply this week.
- Eskom is legally permitted to issue ultimatums to force striking workers to return, with a failure to comply leading to disciplinary action, which may include dismissal. The utility may also engage the Labour Court to issue an interdict against the unprotected strike, which if not complied with, would result in workers being in contempt of court and possibly incarcerated.
- Naspers-owned Prosus saw its shares gain 25% on Monday after it backtracked on its promise not to sell more of Tencent’s stock for three years. Its motivation for the sale of a small portion of its 29% stake (or 131.8 million shares) was to fund a share buyback programme. The open-ended, long-term programme – the size of which was not disclosed – is the latest attempt by Prosus to crush a stubbornly wide gap between market capitalisation and the value of underlying assets.
- At the time of writing, the JSE ALSI was up 0.4% for the week, while the rand was trading 3.4% weaker against the US dollar.
Sources: Dynasty, BusinessLive, Bloomberg, Daily Maverick, Business Insider, Capital Economics, Reuters, etc.