South African Markets
South African scientists discovered a new COVID-19 variant and it has been named “Omicron” after skipping a few letters of the Greek alphabet since Lambda. This new variant has led new cases to surge to just above 4500 at the end of November, from 345 at the same time in the previous month[i]. What we know about the Omicron variant, is that we do not know much yet. The variant seems to be more transmissible than Delta, but currently there is no evidence to suggest that the variant is more deadly. According to Prof Abdul Karim, a South African Public health specialist, available vaccines are still likely to offer good protection against this variant.[ii]
In line with expectation, South Africa’s inflation print edged slightly above the SARB’s midpoint in October, with inflation unchanged at 5% compared to September. The main drivers being food and transport costs, the transport index jumped 10.9% in October compared to a year ago. The weaker Rand and surging Brent crude prices have led fuel prices to rise more than 40% since the beginning of the year.
The South African Reserve Bank hiked interest rates for the first time in 3 years – the lender of last resort hiked interest rates by 25 basis points in the last MPC meeting in November; the decision was split: 3 out of the 5 MPC members voted for a hike in interest rates while 2 voted for a hold in interest rates. The South African Reserve Bank has lagged some of its Emerging Market peers in the rate hiking cycle: Brazil has hiked rates by 3% while Russia and Mexico have hiked by 0.75%. The SA central bank forecasts inflation to average 4.5% in 2022 and 2023. The bank’s quarterly projection model (QPM) expects a rate hike in each quarter of 2022 and 2023.
The Central bank downgraded South Africa’s growth forecast from 5.3% to 5.2%. The July riots, energy woes and supply chain disruptions, mainly caused by the pandemic, are the major reasons for the downgrade. Growth is expected to come in at 1.7% in 2022 and 1.8% in 2023, with the ongoing woes at Eskom a major risk to investor confidence.
South Africa’s unemployment rate remains at levels that put us at risk of an Arab spring or similar social unrest; the official unemployment rate edged higher in the 3rd quarter of 2021 to 34.9% from 34.4% the previous quarter. The unemployment rate according to the expanded definition worsened by 2.2% to 46.6%, this is the highest level since the Quarterly Labour Force Survey records began in 2008. What history tells us is that a high number of economic inactive youth usually leads to revolutions and political instability e.g. Arab Spring. The unemployment crisis in South Africa is a breeding ground for social instability, events that occurred in July can become more frequent going forward.
South African equities continued their stellar performance into November, as the JSE All Share Index broke through the psychological milestone of 70 000 points for the first time in November. The November rally was led by the Telecom sector, MTN was up 26% for the month, and the performance was attributed to strong earnings and approval of the sell down of the Nigerian business and the South African tower business.
The fears of stricter lockdown restrictions and travel bans sent the hotel stocks nose diving in November, Tsogo Sun, Sun International and City Lodge were amongst the worst performers in JSE losing 22%, 21% and 18% respectively.
The Fixed Income Indices were flat in November, the Sovereign bonds were marginally up by 0.64% and Inflation Linked Bonds were marginally down by 0.02%.
The Federal Reserve changed its tone on inflation from inflation being transitory to inflation being sticky. At their last meeting the Fed sounded more hawkish (suggesting tighter monetary policy), Fed chair Jerome Powell announced the Fed will reduce its bond purchasing program and fast track the tapering program on fears of inflation getting out of control. The US inflation print came in at 6.2% in October, this is the highest inflation print in 31 years.
The US economy added 571 000 formal jobs in October, topping the 395 000 estimated by the street. The worker shortage still persisted even though the government funded unemployment benefits wound down in September and schools reopened.
The world’s largest economy grew by 2% in the 3rd quarter of 2021, from a 2.8% forecast by analysts. This is the slowest growth since the 2020 recession. The 3rd quarter saw a major clogging of the nation’s supply chain, which dampened the recovery caused by the COVID-19 pandemic.
US equities started November on a strong note on the back of strong earnings reported in Q3, but all that was wiped out on Black Friday when news broke of the new COVID-19 variant Omicron. The S&P 500 fell 2.73% on the day. The blue chip S&P 500 index ended 0.8% down, but it is still up 21% year to date.
US fixed income markets closed mixed for November, the yield curve has flattened, suggesting that rates hikes are on the cards.
Europe is once again at the epicenter of the COVID-19 pandemic, with more cases being reported each day on the continent than at any previous point. In Austria, Germany and the Netherlands, infection rates have already surged to double those of last winter’s peak. This has led the German government to impose restrictions on unvaccinated citizens.
Inflation continued to accelerate in Europe in October. Consumer prices surged 4.1% in October, the highest level since 2008. This is way above the ECB’s inflation target of 2%. Even though inflation is at elevated levels, the Central bank’s president Christine Lagarde suggests that monetary policy won’t change in the medium term.
European Commission forecasts growth to be at 5% this year, and the 3rd quarter was better than expected at 4.8%. The commission warned that supply chain bottlenecks and surging energy prices may derail the economic recovery in the Union.
European equities followed the global selloff trend on the back of the new COVID-19 variant Omicron spreading across the region. The regional benchmark Eurostoxx 350 Index lost 2.52% of its value in November, led by energy stocks which was hardest hit, most shedding more than 6% of their value.
On the back of rising inflation European inflation Linked Bonds performed extremely well in the month of November, UK Inflation Bonds were up by close to 5% while the Eurozone were up by more than 1%.
European Sovereign Bonds also had strong gains, the Eurozone sovereign bonds gained 1% and UK bonds 2% respectively.
The Turkish Lira crashed more than 30% against the greenback in November, this was caused by the fact that the Turkish central bank cut interest rates while inflation is at elevated levels. This was seen as the central bank bowing to pressure from President Recep Tayyip Erdogan, who is fighting to keep interest rates low.
China’s macro-economic data suggests a modest economic acceleration, retail sales were up by 4.9% in October while industrial output was up by 3.5%. Chinese exports continue to surprise on the upside, with growth of 27% Y-on-Y in October, driven by strong demands from Europe.
Brazil inflation print accelerated to 10.67% in October, from 10.25% in October. The Brazil Central Bank is under pressure to raise rates again in mid-December when the monetary policy committee meet. Brazil is expected to raise the Selic Rate by 150 basis points in December.
Emerging markets equities were heavily sold down in November. The S&P emerging markets index was down nearly by 4% in November, with the Turkish market losing more than 13% in the same month. The UAE was one of the few emerging markets that performed well in November, with gains of more than 8% in November.
Funds on OUTvest Platform
Funds on the OUTvest platform continued their strong performance into November, both in absolute terms and relative to peers. All the Coreshares managed funds managed to outperform more than 70% of their peers year ending November 30th, with the Coreshares OUTStable Index Fund outperforming 97% of its peers.
The Coreshares OUTcautious Index Fund was upgraded by Morningstar from a 3 star rating to a 4 star rating, due to its strong performance this year, the fund managed to outperform 96% of its peers in the same ASISA category in the past year. 2 out of the 4 Morningstar rated funds in the OUTvest platform have a 4-star Morningstar rating while the other two have a 3-star rating.