May 11, 2022
The dominant themes of the first quarter (Q1) carried into Q2: COVID-induced lockdowns in China, which have raised the spectre of slowing economic growth; a protracted war in Ukraine; building inflationary pressures; and the prospect of a more aggressive tightening of monetary policy. The result was volatility and uncertainty continuing into April.
This confluence of factors saw equities sell off in April. Developed market stocks (MSCI World Index) declined 8.3% over the month, while emerging market stocks (MSCI Emerging Markets Index) fared relatively better, down only 5.5%. Regionally, US equities extended losses, with the benchmark S&P 500 Index (-8.7%) posting its biggest monthly loss since March 2022, as the mega-cap tech stocks absorbed the biggest blows. Across the Atlantic, European equities suffered smaller losses, down 5.5% over the same period. In Asian markets, Japan’s Topix closed 8.6% lower for the month, while China’s blue-chip CSI 300 Index (-9.5%) saw heavy losses as investors grew increasingly perturbed by the negative effects of Beijing’s ‘zero-COVID’ strategy.
Fixed Income endured more pressure as global bonds continued to move lower, with markets moving to price in significantly tighter monetary policy on the back of persistently high inflation. The benchmark US 10-year Treasury yield rose towards the 3.0% level during the month (yields rise as prices fall). Quantitative tightening in developed markets and US dollar strength also brought downward pressure on emerging market debt. The Bloomberg Barclays Global Aggregate Bond Index ended the month down 5.5%.
All returns are quoted in US dollars.
Preliminary data showed an unexpected quarter-on-quarter (q/q) contraction of 1.4% in US GDP on an annualised basis in the first three months of 2022. This was the first contraction since mid-2020, reflecting widening trade deficits (which registered record highs in March) and slower inventory growth. While the headline figure raised eyebrows, it did nothing to intimate the US Federal Reserve (Fed) will deviate from its more hawkish course, given the underlying strength of consumer spending (despite the highest inflation rate in 40 years) amid a red-hot labour market, while fixed investment spending also accelerated over the period. The Fed has gradually embraced the view that it may need to “front load” its hiking cycle to allow the policy rate to reach a “neutral level”, with a 50 basis points (bps) hike priced into the market and the likelihood of more to follow in the remainder of the year.
In the first three months of 2022, the Euro Area economy grew by an annualised 0.2% q/q, the slowest pace since the region emerged from recession last year. Household spending in the region appears to have taken a knock from sky-rocketing prices and worsening consumer mood, not helped by tighter financial conditions and high energy costs. Inflation continued to soar with a record print of 7.5% in April, moving to more than three times the European Central Bank’s (ECB) target of 2%. In line with market consensus, the ECB kept the key policy rate steady at 0.50%. The announced schedule for reducing PEPP (Pandemic Emergency Purchase Programme) and winding down APP (Asset Purchase Programme) before the year is out left intact. The Governing Council guided that interest rate hikes would only follow once the asset purchase programmes were concluded, and the hiking cycle would follow a gradual path.
The UK economy grew by 0.1% m/m in February, a sharp retreat from the 0.8% expansion recorded the previous month and below consensus forecasts of +0.3%. Services added the most to the headline figure, up 0.2% amid the reopening of the economy and return to some semblance of normalcy, while industrial productivity declined 0.6% owing to 5.4% contraction in auto manufacturing, which is being hampered by component shortages. Official figures showed further tightening in the labour market as the headline unemployment rate fell to a near 50-year low 3.8% the three months to February 2022. March inflation data showed building price pressures, with a 30-year high print of 7.2%, from 6.2% in February – fuelled largely by soaring transport costs. Interestingly, core inflation (which excludes volatile items such as food and energy) also came in higher than consensus forecasts. Thursday’s ‘Super Thursday’ will see the Bank of England’s (BoE) policy announcement, where the Monetary Policy Committee (MPC) is expected to increase the benchmark interest rate, in line with March guidance that “further modest tightening of policy might be appropriate.”
China’s economy performed better than consensus expectations in Q1. Although services and agricultural sectors lost momentum, the front -loading of infrastructure spending was a boon for industrial production and investment. Meanwhile, purchasing managers’ indices, housing, investment, and retail sales data showed further deterioration in March amid a surge in COVID cases and the resultant lockdown restrictions. The Communist Party’s Politburo, under increasing pressure given the effects of lockdowns on economic activity, pledged additional measures to prop up the economy at its quarterly meeting in April, following growing calls from prominent Chinese economists and policy advisers and a 5.5% growth target in 2022 which is looking harder to achieve. On the monetary policy front, the People’s Bank of China (PBoC) also pledged additional economic support in efforts to pacify investors and analysts amid jittery financial markets, while also cutting the Reserve Requirement Ratio (RRR) for banks with the aim of increasing liquidity. This move also sought to limit the sharp deterioration in the yuan – amid growing concerns surrounding COVID-induced restrictions and the negative implications for the world’s second largest economy.
The devasting floods in parts of the KwaZulu-Natal Province (the second largest contributor to national GDP) is likely to weigh on real GDP in the second quarter. The floods led to more than 400 deaths and will require significant relief efforts to restore public services and business operations and help the thousands left homeless in the aftermath.
South Africa’s economy looks to have sustained weakness in the first three months of the year as unemployment continues to soar to record highs. The manufacturing purchasing managers’ index (PMI) saw a sharp decline to 50.7 in April (from 60.0 in March), impacted largely by the disruption to operations, transportation of staff and damage to infrastructure caused by the floods and ongoing blackouts. Stagflation risks appear to be building, with real GDP forecast to grow at 1.6% and inflation projected to breach the upper band of the South African Reserve Bank’s (SARB) 3–6% target range in Q2. Headline inflation quickened to 5.9% y/y in March, driven primarily by domestic fuel prices but slightly below consensus expectations of 6%. Meanwhile, prices at factory gates (PPI) exceeded expectations in March, printing at 11.9% y/y amid ongoing supply challenges. In politics, a special sitting of the African National Congress’ (ANC) National Executive Committee over 24-25 April delivered several resolutions which have largely been viewed as a positive in President Cyril Ramaphosa’s quest for re-election.
The Bloomberg Commodities Index ended 4.1% higher over the month. Brent Crude oil and West Texas Intermediate prices capped a fifth consecutive month of gains, although prices came off the boil during the month amid mounting concerns over the growth outlook and demand pullback emanating from COVID-induced lockdowns in China. Gold declined by 2% during April, negatively impacted by hawkish central banks and a stronger US dollar.
Figure 1: Hard/Resources
April 2022 % change (US$)
Source: Bloomberg as at 30.04.22.
South African assets were no exception to the down trends seen in financial markets over the month as investors continued to grapple with a slew of headwinds and uncertainty. The benchmark FTSE/JSE All Share Index (ALSI) posted its first negative monthly total return (-3.7%) since September 2021 as commodities took a breather, while the unwelcome return of blackouts also weighed on sentiment. At a super-sector level, financials led the declines (-5.5%), followed by resources (-4.8%) and industrials (-1.7%). In yield-oriented assets, South African government bonds capped a second straight month of losses, with the JSE All Bond Index down 1.7% for the month. Listed property extended losses, to finish the month down 1.5%. Cash, as measured by the STeFI Composite Index, remained broadly stable at 0.36% over the period. In currencies, the rand fell victim to a barrage of domestic and exogenous shocks, which saw it lose ground against all its major trading partners, breaching the R16/US$ threshold for the first time since January.
At the sector level, it was red across the bourse, with financials faring the worst as the sharp deterioration in the local currency dampened investor appetite. Basic materials extended losses amid weakness from industrial and precious metals miners, while chemicals bucked the trend on the back of energy-exposed Sasol. Industrials pared back consecutive months of weakness to turn slightly positive for the month. The consumer goods sector was another bright spot, led by beverages and tobacco, with British American Tobacco benefitting from its rand-hedge characteristics.
Selection of FTSE/JSE All Share Index stock performance
|Name||Index weight||April 2022 % return (ZAR)|
|British American Tobacco||2.2||7.7|
|Kumba Iron Ore||0.4||-18.5|
Source: Bloomberg as at 30.04.22.