Generous central bank and government stimulus programmes have helped to keep the world economy and equity markets afloat since the start of the pandemic. As vaccination drives accelerate across the globe, economists and analysts are speculating about what will happen when these programmes run to an end. Equity markets in China offer us some insight, and it’s not pretty.
The CSI 300 Index has lost 15% since climbing to a 13-year high last month, with concerns over tighter monetary policy replacing optimism on the outlook for economic recovery.
According to Bloomberg, many central banks around the world are grappling with the aftermath of last year’s multiple interest-rate cuts and trillions of dollars in stimulus: The Federal Reserve and the European Central Bank plan to keep policy loose for now; some are increasing borrowing costs to deal with inflation risks, including Brazil, Turkey and Russia; Norway is also turning more hawkish; and South Africa this week opted to keep its interest rates unchanged.
“We think the biggest risk faced by investors between now and the end of 2022 is a premature tightening of liquidity conditions. If central banks were to step in too early relative to when markets expect them to do so. It is a world where we would have an inevitable precipitous fall in asset prices.”
– Ugo Montrucchio, Schroders Portfolio Manager
- Rising US bond yields have put global markets firmly on the backfoot. This follows a prediction from the Federal Reserve that the US economy will grow 6.5% this year, revised upwards from 4.2%. Interest rates were forecast to stay close to zero until at least 2024, even if inflation rises. The 10-year yield on US Treasuries rose to 1.69%, its highest in a year.
- The topic of sourcing funds to pay for Covid relief and stimulus seems set to remain in the headlines. The New York Times has proposed recouping hundreds of billions in unreported taxes as one way to pay the bills. A 2019 IRS analysis estimated that Americans reported less than half of all income that wasn’t subject to verification, meaning that substantial business profits, rent and royalties go untaxed.
- Since Democrats proposed a $1.9 trillion fiscal stimulus in January, hawks have warned that America’s economy might overheat. Larry Summers, a former treasury secretary, is the latest to warn that the economy will suffer either from an inflation surge or from the crushing effects of higher interest rates. America, he says, has the least responsible economic policy in 40 years.
- As the world cautiously pins hopes on an emergence from the pandemic in the second half of 2021, the UK is positioning itself to be at the forefront of a technology-led, low-carbon rebound. This focus will fuel British exports of sustainable goods and services, as the nation helps countries across the globe solve pressing challenges, including decarbonisation and food security.
- Recent developments suggest that we may never achieve herd immunity against SARS-CoV-2. Even the US, which leads most other countries in vaccinations, is unlikely to get there. That’s the upshot of an analysis by Christopher Murray at the University of Washington and Peter Piot at the London School of Hygiene and Tropical Medicine, which warns that we may need to learn to live with Covid for many years to come.
- Israel’s vaccination drive has propelled it toward the top of Bloomberg’s Covid Resilience Ranking, transforming everyday life to rank the country alongside New Zealand and Taiwan as one of the best places to be in the coronavirus era. The US, UK and United Arab Emirates—places where doses given out are enough to cover at least a fifth of the population—all rose in this month’s Ranking, gaining on top performers like Australia and China, where the virus is all but eliminated.
- Pfizer has started human trials of a new pill to treat the coronavirus that could be used at the first sign of illness. If it succeeds in trials, the pill could be prescribed early on in an infection to block viral replication before patients get very sick. Protease inhibitors (a class of antiviral drugs) are widely used to treat other viruses such as HIV and Hepatitis C.
- Over the previous six months, China’s antitrust regulator, the State Administration for Market Regulation, has gone from relative non-interference in the booming tech trade, to criticising corporations such as Tencent, ByteDance and Alibaba. This raises the prospect of even tighter regulation for Chinese BigTechs.
- Meanwhile shares in Tencent and Alibaba were subject to further pressure after US regulators revived threats to toss China’s largest corporations off US bourses.
- The South African Reserve Bank decided yesterday to keep the repo rate steady at 3.5%, following the conclusion of its latest Monetary Policy Committee (MPC) meeting. They chose not to lower rates, despite headline Consumer Price Inflation (CPI) slowing to 2.9% year-on-year in February from 3.2% in January. The move was in line with expectations of most economists and market commentators.
- Fitch Ratings, which downgraded South Africa deeper into junk status in November, forecasts that the economy will expand 4.3% in 2021 and 2.5% in 2022. Chris Holdsworth, Investec’s investment strategist, reports that business confidence in South Africa has returned to pre-Covid levels, but says GDP will take some time to recover, especially with the uncertainty around ongoing load shedding. Watch his video of 5 minutes for more information.
- Eskom continues to pose a threat to South Africa’s economy and public finances. National Treasury is considering whether it would be better to move a chunk of Eskom’s R464 billion ($31 billion) of debt into a special-purpose vehicle (SPV) or have the state take direct responsibility for it. Eskom is not considering any default on its outstanding debt and is in constant discussions with relevant stakeholders. Whichever way the debt is structured, it would almost certainly need to be guaranteed by the government.
- Most of the insurers that provided Steinhoff International Holdings with director-liability policies have agreed to pay as much as €78.1m (R1.4bn) toward legal settlements resulting from a 2017 accounting crisis. The bulk of the money will be offered to shareholders that bought the stock on the open market in exchange for certain waivers and releases.
- In the same week as the Constitutional Court hears a case of contempt of court against former president Jacob Zuma, Dali Mpofu told Minister Pravin Gordhan’s lawyer at the Zondo commission to ‘shut up’ in an emotional outburst. This is seen as part of a wider pattern of attacks on the judiciary and the constitutional order as the net closes in on state capture culprits.
- ANC factional battles continue to rage, with supporters of President Ramaphosa warning that the party’s so-called “radical economic transformation” faction is starting to look like a party within a party. This has led to thoughts by analysts that the ANC may splinter yet again as the factions continue to struggle for power within party and state. Professor Ivor Sarakinsky, Dynasty’s primary consulting political analyst, says: “It is not yet clear what the relative strengths of the factions are, and we await the outcomes of the National Executive Committee (NEC) meeting this weekend to give us some indication of where the balance of power is at present.” (Within the next couple of weeks, we will share an opinion piece by Professor Sarakinsky to explain the implications of this watershed dynamic).
Sources: Dynasty, Bloomberg, The New York Times, The Wall Street Journal, Economic Times, Daily Maverick, BizNews, Business Day, Moneyweb, etc.