In this economic review, we focus on events that moved the market in Q3 2021. On the global front, we saw two main prominent influences: inflation fears and China regulatory crackdown. In hindsight, local markets were affected by negative tourism and a weak Rand made offshore investments more attractive.
Global Markets
Global bond markets came under pressure in the third quarter, and many equity markets produced negative returns, with emerging markets and currencies lagging developed markets. For equities, a rise in bond yields typically equates to downward pressure on stock prices, which is what we saw in the third quarter (with the exception of energy companies).
Global bonds were positive over the quarter, returning 4.5%. The market also needed time to digest the timing of the US Federal Reserve stimulus drying up (and economic recovery tapering off), and what that would ultimately mean for the normalisation of interest rates which are still near 0.0%.
The MSCI World Index (which captures large and mid-cap representation across Developed Markets countries) returned 5.4%, however the MSCI EM Index (which captures large and mid cap representation across Emerging Markets countries) declined by 3.1%.
One of the bigger movements affecting the global front was the share price drop of China’s Evergrande, one of the world’s largest property developers, with a share price fall around 33% m/m – in addition, we saw an extension of the Chinese regulator clamping down on gaming companies.
On a positive note, Japan’s economy recorded positive growth after some time – with a 0.5% GDP expansion in Q2 compared to -1.1% in Q1. All in all, global growth continues on a steady trajectory and the outlook remains positive for the future.
Local Markets
The FTSE/JSE All Share Index returned -0.84% in Q3 2021, with the resource sector being the hardest hit, declining -9.5%. The latest inflation rate still sits comfortably within the SARB’s 3%- 6% target rate.
On the pandemic front, the vaccination rollout gained momentum as the lockdown restrictions eased. However, due to South Africa being on the UK’s “red list of entry” in Q3 (which forced visitors to quarantine in hotels at their own cost upon arrival) local tourism was hurt, resulting in an estimated collective loss of R26 million each day – especially since the UK is SA’s biggest source of tourism in the northern hemisphere.
The SA Reserve Bank (SARB) left repo rates unchanged, as anticipated. Local listed property continued a recent trend of strong performance, ending the quarter as the best performing local asset by some margin.
On the other hand, bonds had a tough quarter – coming under pressure as a result of the impending tapering of asset purchases in the US and the possible increase in developed market interest rates sooner than was originally expected – delivering 0.37% and underperforming cash at 0.95%. The broader equity market in South Africa was only marginally negative (in rand terms).
The Rand weakened over Q3 2021 (hitting a new low in September) depreciating by about 5.1% and making offshore assets more attractive as it acted as a tailwind to the performance of global asset classes. This was largely as a result of strength in perceived safe-haven currencies, including the US dollar.
Conclusion
Global recovery is lifting the South African economy and local growth is proving better than expected – with revised local growth estimates remain relatively good compared to what was anticipated at the beginning of the year. In a forward-looking sense, many market participants are still encouraged by the economic recovery. However, experts warn that more concrete and creative solutions may be required to stimulate growth in the economy post-pandemic.
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