TVC Economic Review: Q2 2021

In this economic review, we focus on events that moved the market in Q2 2021. Globally we’ve seen things improving dramatically, however on the local front there is still some volatility. 

Global Markets

In quarter 2, we witnessed the global economy rebounding at a brisk pace as it emerged from the coronavirus pandemic. Stock and bond markets posted broad gains – stocks in particular were driven by the dynamics of a recovering economy and in the bond market investors returned following a rough first quarter. Volatility ebbed and we saw record high commodity prices, as equities continued to deliver strong performance over the quarter.

This better-than-expected global recovery was accompanied by improved economic outlook; the global real GDP growth for 2021 is now expected to be the fastest in more than 40 years, at 5.8% (a 0.5% upgrade relative to the quarter 1 forecast) – mainly driven by advanced economies. However, the emergence of the Delta variant of the Coronavirus has raised concerns that growth could be negatively affected by the uneven pace at which vaccinations are taking place between countries.

While the MSCI World Index is high, it would need to increase markedly from current levels to derail the momentum in markets. An overweight position is retained in developed and emerging markets, tilted more in favour of developed markets in the near term as Chinese tech company valuations are reset.

The currency market saw increased volatility, with the US dollar perking up in June after sharply declining for most of the quarter. After experiencing increasing success, cryptocurrencies saw sharp declines in quarter 2 amongst regulatory scrutiny.

Local Markets

We ended the second quarter with a stricter lockdown amid wave three fears, and with the feeling of deja vu. The country’s vaccine rollout remains slow, in line with the continent (1% of the population of Africa was vaccinated as of June 2021, compared to 50% of the populations in the United States and the United Kingdom).

This is being offset to some extent by record high commodity prices, higher terms of trade and a stronger Rand, However slow pace of economic reforms, and the recent spate of vandalism and looting means that South African government may need to double down on social and structural reforms in order to get back on to the path of recovery.

Current affairs affecting the market included Eskom shedding some if it’s debt, the country’s latest unemployment stats being released, and the Zuma court case coming to a close.

In May SA recorded a shortfall of 11.2% of GDP, on its main budget for the year through March 2021, and in June our GDP grew by 1% (an annualised 4.6%) in the three months through March from the previous quarter. However, GDP contracted 3.2% year-on- year, which means output is still down.

The local bond market rebounded strongly during the quarter after a difficult start to the year, whilst local equities ended the quarter flat. The domestic equity market is trading at a substantial discount to both developed and emerging markets – due to the country’s structurally low growth rate. Property continues to recover lost ground from a tumultuous 2020, largely due to the significant strain placed on property counters from the economic impact of the Covid-19 pandemic.

The Consumer Confidence Index fell to -13 from a reading of -9 in the first quarter, with South Africa’s annual consumer inflation reaching its highest level in 30 months, rising to 5.2% in May from 4.4% in April (this rise in inflation is a global phenomenon).

In Conclusion

While things are improving overall, South Africa still lags somewhat.

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