TVC Economic Review: Q1 2022

Looking back at the first quarter of the year, we consider events that moved the markets. At the start of 2022, the global economy was on a trajectory to bounce back from the Omnicron COVID-19 variant – with some recovery in consumer spending and business investment.

However, as Russia invaded Ukraine at the end of February 2022 (due to Russia’s strong opposition to Ukraine’s wishes of joining NATO), the world experienced shocks as we witnessed not only a humanitarian crisis but significant economic impacts; including considerable market volatility and significantly higher commodity prices. Meanwhile back home, the equity market showed resilience and the National Budget Speech instilled confidence.

Global Markets

The quarter began with expectations of the United States Federal Reserve hiking interest rates for the first time in more than three years (which was later realised by them raising the percentage point rate by 0.25%), implying that they no longer consider higher inflation as being transitory and that the outlook for monetary policy had become more hawkish.

As mentioned, the most significant event from quarter one of 2022 was the Russia / Ukraine conflict, which shocked commodity prices and exacerbated trends that were already underway, accelerating shifts in markets that had already begun; towards higher inflation, shortages in energy and commodities, a retreat from globalisation, and rising geopolitical risk.

Not surprisingly, this dented the global economic outlook, which later in this quarter was also threatened by renewed COVID-19 concerns in China, as the Omicron variant’s spread led to lockdowns in the major cities, compounding supply chain disruptions around the world.

Global equities were worst affected as a result of the heightened risks, with global financial markets suffering a setback this quarter, after a strong year in 2021. Financial markets were volatile over the quarter and global bonds – usually the safe haven asset class – were also negative over this quarter, returning -14.0%.

Emerging market (EM) equities were down in Q1 as geopolitical tensions took centre stage and EM bond returns were negative. The MSCI Emerging Markets Index – which captures large and mid cap representation across 24 Emerging Markets (EM) countries) – declined by -15.2%. On the other hand, the MSCI World Index (which captures large and mid-cap representation across 23 Developed Markets countries) returned -13.5% in rand terms.

When it came to stocks, the U.S.based ‘S&P 500’ – stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States – decreased by 4.6% in Q1 2022, and the MSCI All Country World Index (a stock index that tracks nearly 3,000 stocks in 48 developed and emerging market countries) fell 5.3%.

Across the world we saw regions struggle to stabilise; as US Real Gross Domestic Product contracted by 1.4 percent (annualised), UK’s economy shrank by 0.1% in March, and Indonesia’s economy maintained steady growth momentum in the first quarter.

Local Markets

During quarter one, South Africa was doing somewhat well compared to the global economy – further boosted by the high commodity prices and large-scale government spending (as some confidence seemingly returned for businesses and consumers), the equity market proving resilient and the National Budget in February instilling confidence.

In fact, indicators from key country indexes (such as BankservAfrica Economic Transactions Index and Absa Purchasing Managers’ Index) show improvement and recovery across sectors in the country.

Bucking the global trend, South Africa saw continued rise in commodity prices and the rand strengthened by 9.9% in Q1 2022. Our equity market – as measured by the FTSE/ JSE Capped SWIX – posted an impressive rise this quarter (+6.7%) despite global negativity, building on a solid 2021.

However, sadly we are not spared rising inflation and commodity prices, the knock-on effect of the Ukrainian crisis. SA’s inflation rate was rising above the upper inflation target of 6 percent – with credit rating agency Moody’s predicting that inflation will rise to 8% in South Africa this year, far above the Reserve Bank’s (SARB) target band, and the Bank’s forecast of headline inflation for 2022 was revised higher to 5.8% (from 4.9%), as a consequence of higher food and fuel prices. This will likely slow down the economy and hurt local consumers’ pockets.

March saw a petrol price hike of R1.46 per litre for petrol and up to R1.48 per litre for diesel. Higher fuel and food prices are expected to hamper consumer and business confidence, and continued increases are likely to have a direct impact on the poor, as well as long-term inflation.

Bonds had a reasonable quarter, delivering 1.9%, while SA property was on the decline (-1.6%), experiencing a difficult start to 2021 as the market grappled with the prospects for dividend growth.

Off the back of the National Budget Speech in February, the global rating agencies, fortunately, lifted the negative outlooks for the country back to stable. National Treasury also announced significant changes to the framework that governs how much of South African retirement savers’ portfolios can be invested outside of the country (Regulation 28), opening the door for additional foreign exposure – a positive for South African investors over the long term.

Looking forward:

As the Ukraine war is likely to accelerate “inflationary problems” caused by the pandemic, fears of a global recession mount. Even as South Africa’s GDP growth has been revised downward, recession risk looks unlikely in 2022 and there are indications that the first-quarter GDP figures should show good growth.

Where stocks are concerned, history shows that market downturns happen quite often but are never permanent – even as the short to long term might seem uncertain, over longer periods of time, stocks have tended to move steadily higher.

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