With inflation worries on the horizon internationally and locally, many are concerned that this could adversely affect economic growth and corporate earnings, which have just started to recover from the extreme downside caused by the global coronavirus pandemic. As inflation increases, central banks are tapering off stimulus packages, and need to do so in a manner that will not provide further shocks to an already fragile market.
Just recently, the European Central Bank became the latest major central bank to move toward reducing monetary accommodation, stating it is set to run its Pandemic Emergency Purchase Program at a “moderately lower pace”. But as more G10 central banks prepare to moderate their ultra-loose policy stances, they have also gone to great lengths to reassure markets that the unwinding will be done gradually – and have drawn a distinction between tapering and interest rate hikes.
This comes as Federal Reserve Chair Jerome Powell has indicated that a reduction of bond purchases could start this year. The US economy, he said, had now met the test of “substantial further progress” toward the Fed’s inflation objective while the labour market had also made “clear progress”.
Although a reduction in quantitative easing this year would be earlier than many economists had been forecasting as recently as a few weeks ago, the market reaction to the speech was positive, with the S&P 500 ending the day 0.9% higher and ten-year US Treasury yields falling several basis points.
With South Africa’s inflation sneaking up, eyes are on the Reserve Bank to determine whether local interest rates will be increased, while we still await economic indicators that will indicate how much damage was done by the July riots. Our base case view at this stage is that rates will not be hiked at the next MPC meeting.
At this time, where equity markets and emerging market currencies could be vulnerable to inflation induced setbacks, we are actively managing downside risk by preferring investment in quality, unleveraged companies in defensive sectors, while we continue to increase global exposure for many of our domestic investors at current exchange rates.
“69% of respondents said they were very interested in advice on how to manage the risk of volatility in the market, while 62% are highly interested in protecting their portfolio against downside risks in the next six months.”
– 2Q21 UBS Investor Sentiment survey
- World stocks started the week on the back foot, slipping to two-and-a-half-week lows on further signs of accelerating inflation as well as tax and regulatory pressures on the world’s biggest companies in China. Equity markets are down so far in September after a seven-month winning streak, pressured by inflation, which may prove less transitory than flagged by central bankers.
- August’s US inflation figure, which came in at 5.3%, was the third consecutive month of inflation at roughly that pace. By contrast the trimmed-mean rate – using the Federal Reserve’s preferred measure, the personal consumption expenditures price index – has remained at just about 2%, in line with the central bank’s inflation target.
- Inflation could well be pushed higher by shortages of several items being reported across bourbon, bulldozers, and Velcro. The upshot is a world where buyers must wait for delivery of items that were once plentiful – if they can get them at all. Along with the shortages come hefty price increases, which have fuelled fears of a wave of sustained inflation. Read more here.
- The European Central Bank has become the latest major central bank to move toward reducing monetary accommodation, as it is set to run its Pandemic Emergency Purchase Program at a “moderately lower pace”. But as more G10 central banks prepare to moderate their ultra-loose policy stances, they have also gone to great lengths to reassure markets that the unwinding will be done gradually and have drawn a distinction between tapering and interest rate hike.
- This comes as Federal Reserve Chair Jerome Powell has indicated that a reduction of bond purchases could start this year. The US economy, he said, had now met the test of “substantial further progress” toward the Fed’s inflation objective while the labour market had also made “clear progress.” Although a reduction in quantitative easing this year would be earlier than many economists had been forecasting as recently as a few weeks ago, the market reaction to the speech was positive, with the S&P 500 ending the day 0.9% higher and 10-year US Treasury yields falling several basis points.
- China has recorded its highest trade balance since January based on its August numbers. The trade balance, at a surplus of $58.34 billion, was also well above market expectations for a $53.2 billion surplus, and higher than the revised $56.59 billion surplus recorded in July. Both imports and exports increased in the month, with imports rising at a marginally higher rate of 4.4% month-on-month, while exports rose by 4.1% month-on-month. On a yearly basis, imports also rose at a faster rate than exports.
- In company news, Tesco, Britain’s biggest supermarket group, is trialling a strategy to cut plastic waste that allows customers to buy food, drink, household and beauty products in reusable packaging. Through a partnership with Loop, the global reusable packaging platform, customers in ten Tesco stores in eastern England will be able to buy products in reusable packaging that can be returned to stores when finished so it can be cleaned, refilled, and reused.
- Microsoft’s board has approved a plan to buy back as much as $60 billion of its stock, extending the tech giant’s extensive repurchase program at a time when Congressional Democrats have proposed taxing companies that do buybacks. Microsoft didn’t provide a timetable for the repurchases, and the programme doesn’t have an expiration date and could be terminated any time.
- For those hoping to see light at the end of the Covid-19 tunnel over the next three to six months, scientists have warned that we will have to brace for more of what we’ve already been through. Almost everyone will be either infected or vaccinated before the pandemic ends, experts agree – maybe both. An unlucky few will contract the virus more than once. The race between the waves of transmission that lead to new variants and the battle to get the globe inoculated won’t be over until the coronavirus has touched all of us.
- This comes as Singapore has tightened pandemic-related restrictions, more than half of Australia’s 25 million population remain subject to stay-at-home rules, and Japan has extended emergency restrictions in Tokyo and other regions until the end of the month. At the same time, progress is being made in curbing the pandemic and restoring economic normality.
- Most economists out of 29 surveyed feel the South African Reserve Bank is likely to keep interest rates on hold at next week’s meeting of its monetary policy committee, given record unemployment levels amid a still-nascent economic recovery and benign inflation outlook. The Bank has held the benchmark rate at 3.5% – its lowest level in almost five decades – for more than a year now to support the economy through the ravages of the coronavirus pandemic.
- This comes as Business Day’s Claire Bisseker argues that the biggest obstacle to lower inflation is overcoming government inefficiency, which keeps administered prices high. She says that, emboldened by its success in shifting actual inflation and inflation expectations from a sticky 6% to 4.5% over the past few years, without having to hike rates or sacrifice growth unduly, South African Reserve Bank Governor Lesetja Kganyago thinks it’s high time for South Africa to lower the target to 3%. A lower inflation rate target means higher interest rates, which will not assist economic growth, especially if wages do not keep pace, as consumer spending will be curtailed. The trick is to permanently lower inflation without sacrificing growth by unduly hiking rates.
- In political news, former Business Day editor Peter Bruce has stated that President Cyril Ramaphosa is sapped by the ANC and has no policies or priorities. He writes that there seems no question now that Ramaphosa knew about, and approved of, former president Jacob Zuma’s early release from prison. Supposedly, the former president was indeed ill, but there’s no independent evidence to support this. This gives investors the impression of a country in which there is no law, or alternatively that the law is inconsistently applied.
- The Supreme Court of Appeal has dismissed Public Protector Busisiwe Mkhwebane’s bid to appeal the invalidation of her report on Pravin Gordhan’s decision to grant South African Revenue Service official Ivan Pillay early retirement after finding it had “no prospects of success”. Mkhwebane’s report on Pillay’s early retirement was released the day before Ramaphosa’s May 2019 inauguration. That particular report found Gordhan had irregularly approved Pillay’s early retirement from SARS, with full benefits, and had ordered that Ramaphosa take appropriate disciplinary action against the minister for failing to uphold the Constitution.
- Imperial Logistics appears set to proceed with a R12.7 billion takeover offer from Dubai Ports World, saying it is confident that opposition from its fourth-biggest investor won’t derail the transaction. This comes ahead of a shareholder vote on Friday. So far, most shareholders had expressed support for the transaction. PSG, however, says the offer, a 40% premium, is too low.
- Business Leadership South Africa has enlisted some of the world’s best-known companies to campaign for the removal of UK travel restrictions that threaten to bring a second summer of misery to South African tourism. Travel between the countries is not prohibited, but South Africa is still on a “red list” – anyone entering from such destinations must spend ten days in a quarantine hotel and pay more than £2,000 (R39,000).
Sources: Dynasty, BusinessLive, News24, Reuters, Business Insider, Bloomberg, Stanlib, The Economist, Wall Street Journal, UBS, etc.