Just how different this year is proving to investors!
Most analysts expected some action on interest rates from the US Federal Reserve in 2022, but perhaps not the five rate hikes they’re now pricing in. Inflation was clearly driving upwards, but we’re seeing much higher, more consistent price increases.
Since early January, many global institutional investors, including hedge funds, have been moving their money away from growth-led tech companies trading on stretched multiples towards those in the value category. A portion of these equity outflows have also been in search of yield, and some monies have found their way to emerging market bond markets, including South Africa.
Added to this is Russia and Ukraine being at one another’s throats, with currencies and commodities moving in all directions. The rand is seemingly defying the odds and was firmer for the week trading at R15.03 against the US dollar this afternoon. The resilience of the rand is accompanied by other emerging market currencies such as the Mexican peso, up 1.1% year-to-date, and the Chinese renminbi, up 0.45% year-to-date. During the week, the Russian ruble has gained 1.06%, although the Ukranian hryvnia has weakened slightly be 0.18%. In fact, the Russian ruble is pretty much unchanged so far in 2022.
A look at these movements in the face of such geopolitical uncertainty would indicate that investors are relatively sanguine about emerging market currencies, and that the dollar has thus far not stood out as a safe haven currency.
There may also be a cause to be sanguine about rate hikes in the US. The Fed minutes this week showed no indication of inter-meeting emergency rate hikes of 50 basis points incrementally, nor was there a suggestion to force inflation out of the system by driving GDP below trend. Should this turn out to be the case, investors could well expect a rebound in big tech stocks and in equity markets generally.
“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”
– Warren Buffett
- US officials have warned that Moscow could launch an attack on Ukraine after amassing more than 100 000 troops close to its neighbour’s border, with the West preparing heavy sanctions. A Russian invasion of Ukraine could push economies into recession, posing another significant risk for equity markets.
- Meanwhile, Ukraine has claimed that its defence ministry and two banks were hacked on Tuesday, as it appeared to blame Russia. This comes as the West seeks evidence from Moscow of a partial troop pullback. The Kremlin, the US and Europe are engaged in one of the deepest crises in East-West relations for decades over Ukraine, post-Cold War influence on the continent, and energy supplies as Moscow wants to stop Kyiv ever joining NATO.
- Stocks were stable on Friday, while havens such as gold and bonds dipped as planned talks between Russia and the US over Ukraine alleviated some investor gloom about geopolitical risks. However, global stocks are set for a second week of losses, sapped by the standoff between Russia and the West, as well as a possible tightening of monetary policy by the Federal Reserve.
- The prospect of a meeting between Russian and US leaders coaxed investors out of safer investments, sending Treasury yields up slightly and pulling bullion below $1 900 an ounce, a level it had only just scaled this week for the first time since June. The yen fell and the dollar was unchanged.
- Meanwhile, crude oil slipped as traders balanced the potential return of Iranian barrels – if the nation reaches a nuclear accord with world powers – against the risk of disruption to Russian energy supplies.
- Airlines and the leasing companies, which control billions of dollars of passenger jets, are drawing up contingency plans for a freeze in business with Russia if the standoff on Ukraine’s border boils over into a military conflict.
- UK annual inflation has hit the highest level since 1992, adding pressure to the cost of living and on the Bank of England to continue raising rates. The Consumer Price Index edged up to 5.5% in January from 5.4% in December, also a level not seen in almost three decades, according to the Office for National Statistics.
- In company news, Nissan recently announced a new £13 billion investment to help transition its business to being focused on electric vehicles. The investment is centred around its Sunderland plant in the northeast of England, which already makes the popular Nissan Leaf, and a plan to build 23 new electric models by 2030.
- Thousands of Volkswagen Group cars, including brands such as Audi and Porsche, destined for the US market, have been left adrift and unmanned on a burning cargo ship. The Panama-flagged Felicity Ace, which is roughly the size of three football fields, caught fire near the Azores islands on Wednesday afternoon. All 22 crew were evacuated and taken to a local hotel by the Portuguese Navy and Air Force.
- Many clients have queried the convincing 6.7% year-to-date out-performance of the rand against the US dollar as of Wednesday, despite the escalation in a range of key risks. Factors that have positively impacted the rand (as well as some other emerging market currencies) include: many emerging market currencies were perhaps over-sold towards the end of 2021; several emerging markets have increased their rates in the past few months, thereby attracting foreign portfolio inflows; a surge in commodity prices has benefited emerging market commodity producing countries such as South Africa; and many foreign investors regard emerging market assets to be relatively cheap, once again promoting foreign portfolio inflows. Nonetheless, our currency model continues to suggest that SA-specific risks are not being fully priced into the current rand/US dollar exchange rate – a factor we believe is likely to gain prominence as the year progresses.
- Traders held bets that South Africa’s central bank will continue its hiking cycle next month as inflation remains close to the top of its target range. Statistics South Africa this week said the annual inflation rate fell to 5.7% in January, from 5.9% a month earlier. That matched the median of 13 economists’ estimates in a Bloomberg survey.
- South Africa is set for a “good” news budget next Wednesday due to the anticipated revenue overrun of between R160 billion and R180 billion, which will result in a lower fiscal deficit than projected a year ago. The overrun will reduce two significant risks to the fiscus posed by government, namely over-spending on the wage bill for public servants, and the extension of the R350 per month Social Relief of Distress grant. Although the debt metrics are likely to improve, we are mindful Stats SA made an upwards revision of the size of the economy to 11% last year, which immediately reduced the debt-to-GDP ratio.
- In an opinion piece on BusinessLive, Garth Rossiter, chief risk officer for SME services provider Lulalend, states that without a thriving SME sector, tax revenue will continue to dry up. “It just gets harder and harder for finance minister Enoch Godongwana. He is not going to please everyone with his upcoming budget speech, and anything he proposes is going to involve big trade-offs.”
- In a letter to Business Day, Duma Gqubule writes that “with an annual average of 6% GDP growth until 2030, we would only reduce the number of unemployed by 1.1 million. There would still be about 11.4 million unemployed people by the end of the decade, and the expanded unemployment rate would decline to 34.2% from 46.6%.”
- Helmoed Römer Heitman, an independent security and defence analyst, has argued that South Africa’s military is on a downward spiral towards becoming a mere militia. In the meantime, cabinet is either clueless about what is required, or unwilling to listen to those who do. Read more here.
- Billions of dollars in climate funds, pledged by rich nations during COP26 to help South Africa move away from fossil fuels and reduce coal emissions, face an uncertain future. There appears to be uncertainly within the country over how the $8.5 billion should be used. Some believe these funds should be allocated to electric vehicles, hydrogen power or the state-owned utility Eskom, which itself proposed that a substantial portion be used to expand its grid and encourage additional investment.
Sources: Dynasty, News24, Business Day, Bloomberg, Reuters, AFP, etc.