Nov 9, 2021
Despite the heavy background noise of soaring energy prices, rising input costs, rumblings of ‘hyperinflation’ / ‘stagflation’, weak US and Chinese economic data, the impending Fed tapering, and now further down the list of worries but still very much present – COVID, equity markets soared to record highs during the month on the back of an overall promising start to the third quarter (Q3) corporate earnings season, meanwhile the decibel levels were getting too loud for the seemingly more sober bond markets.
Developed market (DM) equities (MSCI World Index) recovered from a bruising September, up 5.6% in October, while their emerging market (EM) peers (MSCI Emerging Markets Index) rebounded with a +0.9% return. Across regions, the US benchmark S&P 500 Index (+6.9%) and tech-heavy NASDAQ (+7.3%) booked record highs over the period, turbocharged by Tesla and a beat on expectations by more than 80% of reporting firms (at the time of writing). European shares recouped all their September losses on the back of strong Q3 earnings, with the pan-European Stoxx 600 up 4.6% for the month. Asian stock returns were mixed – with Japan’s Topix down 1.4%, while mainland China’s CSI 300 Index (1.0%) bounced back amid easing fears surrounding its heavily indebted property sector.
In fixed income, bond markets whipsawed throughout the month as persisting supply chain bottlenecks and increasingly stubborn inflation pushed markets to price in an earlier-than-expected normalisation of monetary policy. The yield on the US 10-year note rose to 1.56% at end of the month, while across the Atlantic, yields also climbed, with the German bund 10-year ending the month in less negative territory. The Bloomberg Barclays Global Aggregate Bond Index ended the month down 0.2%.
All returns are quoted in US dollars.
The US economy grew at a slower pace than expected, with an annualised GDP print of +2% in Q3, below consensus expectations of +2.6%. This was the slowest pace of expansion in the post-pandemic recovery period on the back of supply chain disruptions and waning investment and spending. The manufacturing purchasing managers’ index (PMI) came in at 60.8 in October, from 61.1 the previous month as supply-side constraints and rising input costs continued to weigh down activity on factory floors. Headline inflation soared past economist expectations (5.3%) to a 13-year high of 5.4% in September, up from 5.3% in August. The Federal Open Market Committee (FOMC) is scheduled to communicate its latest policy decisions on 3 November, where it is widely expected to maintain the Federal funds target range steady at 0.00-0.25% (markets are pricing in the first rate hike in Q3 2022, in line with recent ‘dot plot’ projections). Attention will be squarely focused on what the FOMC announces in relation to the tapering of its monthly bond purchases under the quantitative easing programme, which committee members, alongside Federal Reserve Chair Jerome Powell, have signalled would “easily move ahead” in November.
The European economy delivered strong growth in Q3 2021, and while it outpaced the larger Chinese and US economies, the region is emerging from a much lower base and is yet to return to pre-pandemic levels, in contrast to the other two nations. The strong performance was on the back of higher vaccination rates through the summer, strong domestic demand, and activity at ports, although restrained significantly by the supply chain shortages and associated rise in prices. Consumer prices spiked to an annual print of 4.1% on the back of soaring energy prices. European Central Bank (ECB) President Christine Lagarde stuck to the dovish script during a virtual press conference on 28 October, in which she reiterated that the bank expects inflation to moderate throughout 2022 and revert to below target over the medium term – pushing back against market expectations of looming rate hikes next year. The ECB’s governing council believes the bloc’s economy will achieve its pre-pandemic levels by the end of 2021 on the back of strong domestic demand, while at the same time warning of labour and materials shortages which may hamper the recovery. The December meeting is billed to be the more pivotal meeting, where policy direction looks poised to come under a more robust debate.
The UK economy bounced back at a rate of 5.5% quarter on quarter (q/q) in Q2 2021, stronger than the initial estimate of 4.8%. While a strong resurgence from the winter lockdown, the economy has still not returned to its pre-pandemic level. With the economy likely to have already peaked since the final removal of restrictions in August, the prospects of clawing back the shortfall appear to be running out of road as the year draws to a close. Recent indicators also point to slowing momentum amid a weaker environment for business and consumers. The UK is poised to lag other advanced economies such as the US and the eurozone, ending the year with a weaker full-year print for 2021. At the same time, a tight labour market and a spike in gas prices are fuelling inflation alongside supply chain disruptions. Pandemic relief measures such as the furlough scheme also expired on 30 September, which are likely to weigh on household finances, leading to weaker consumer confidence and household spending. Bank of England (BoE) Governor Andrew Bailey thus faces a tough and tricky test of keeping inflation in check without further supressing growth conditions. At the time of writing, money markets are pricing in three interest rate hikes in 2023.
China’s economy slowed in Q3 to 4.9% year on year (y/y), a sharp decline from the 7.9% growth recorded in the Q2 and below consensus expectations of 5.2%. This print was the slowest pace in growth since Q3 2021 and comes off the back of an economy that has had to battle a myriad of headwinds, including Delta-induced restrictions; supply-chain bottlenecks; a global chip shortage; shutdowns at regional ports; skyrocketing commodity prices; and an unprecedented regulatory crackdown across various sectors. That said, the annual growth target of 6% set by the Chinese government at the outset of 2021 remains within reach, on account of robust growth earlier in the year. Attention will now turn to the People’s Bank of China (PBoC) and how it intends to stem the decline and turbocharge the economy. The bank has thus far kept policy rates unchanged since early last year, while delivering a surprise reduction in the reserve requirement ratio back in July. In September, the bank injected liquidity into the system as it tried to stem serious contagion to other markets from the Evergrande saga. This was followed up in October with c.CNY1 trillion of liquidity injected into the banking system through open market operations. The Ministry of Finance has also urged local governments to ramp up borrowing by the end of November following a year of sluggish bond issuance.
The manufacturing PMI weakened again in October (53.6) from a downwardly revised 54.7 in September. The 4-point retreat in the gauge could largely be attributed to the protest action in the steel and engineering industry, which lasted a good three weeks, and the ominous return of rolling blackouts by state utility Eskom. Price pressures continued to build as producer price inflation (PPI) quickened to 7.8% y/y in September, from 7.2% in August, higher than consensus expectations of 7.3%, with the higher oil price and double-digit increases in the cost of electricity weighing on producers. Likewise, consumer price pressures have also intensified, with headline inflation printing at 5.0% y/y in September, from 4.9% in August, driven largely by higher food and fuel prices, above consensus expectations of 4.8%. The petrol price is scheduled to rise on 3 November, which will only add to inflationary pressures. Recent warnings by the South African Reserve Bank (SARB) of potential upside risks to the inflation outlook has further prompted money markets to price in a 25 basis point hike in the main lending rate at the November MPC meeting – brought forward from Q1 2023.
The Bloomberg Commodities Index posted another positive month with a 2.6% gain. It was broadly positive across the board, with the surge in prices continuing to add to inflationary worries. Energy prices continued their strong run with Brent Crude up 7.5% in October, with the oil price topping US$85 a barrel in the final days of October as supply struggles to keep up with demand. Elsewhere, copper prices had a good month, up 6.3%, while gold (+1.5%) also returned to positive territory against a weaker greenback as weak US data dimmed the outlook for much earlier hikes by the Fed.
Figure 1: October 2021 % change (US$)
Source: Bloomberg as at 31.10.21.
South African equities rebounded along with their global peers, with the benchmark FTSE/JSE All Share Index (ALSI) up a strong 5.2%, comfortably ahead of the Capped SWIX which could only manage +2.7%. At a super-sector level, resources did most of the hard yards, up 8.4%, supported by industrials (+6.7%), while financials ended the month down 2.9%. The JSE All Bond Index (-0.5%) continued to be buffeted by the external headwinds from China, intensifying inflation fears and hawkish pivots by major central banks, while we also saw local risks such as elections and power outages begin to dampen investor sentiment toward local bonds and the rand. The listed property (JSE All Property Index) sector booked another month of losses, down 1.4%. Cash, as measured by the STeFI Composite Index, remained broadly stable at 0.3% for the month. In currencies, the rand deteriorated against the greenback, euro and pound sterling.
At the sector level, key leaders included basic materials, led by industrial metals and forestry and paper (i.e., Sappi), while precious metals also bounced back, with platinum (e.g. Royal Bafokeng - further boosted by news of the proposed Impala Platinum buyout) and gold miners (i.e., Gold Fields and AngloGold Ashanti) delivering strong gains over the month. Consumer goods were propped up by global cyclical bellwether Richemont, while consumer services also performed strongly, supported by a robust rebound by the travel and leisure sub-sector (Sun International and Tsogo Sun). On a more negative note, healthcare ended in the red as Aspen Pharmacare gave up its recent run of robust performance. ‘SA Inc.’ (companies that derive most of their revenue from South Africa) plays struggled over the period, with the banks struggling amid a weak local currency environment, while retailers and food producers found the going tough with the prospect of rising costs of capital and a weaker growth outlook spelling trouble for earnings.
Selection of FTSE/JSE All Share Index stock performance
|Name||Index weight||October 2021 % return (ZAR)|
Source: Bloomberg as at 31.10.21.