In this Economic Review blog, we look back at the second quarter of the year and consider events that moved the markets in Q2 of 2022.
What is an economic review and why is it important?
Economic dips, peaks, cycles and changes affect the investor landscape, as well as having a financial impact on everyone who is part of that economy, especially business owners.
TVC Health and Wealth Managers release an economic review blog post every quarter looking back at and providing analysis and commentary on what happened economically in South Africa and globally during that time. We consider and summarise trends, developments, financial data, and major events that moved the market. Not only is assessing and predicting the performance of the economy important for understanding the world around us, and is important for investors, but economic change also affects businesses, because changing levels of consumer income effects spending habits.
As a general overview for quarter two, of most significance, is the deceleration in global growth. This was determined by increased geopolitical risk, higher inflation – leading to tighter central bank policy and higher interest rates – and a shaken global supply chain due to strict lockdowns in China and the continued impact of Russia’s invasion of Ukraine.
Locally in South Africa, we faced a number of our own challenges including major flooding in KwaZulu-Natal, the reinstatement of load shedding, and slow pace of policy reform. Coupled with the rising fuel and food prices, and rising interest rates in line with global trends, it’s no wonder South Africa experienced low economic growth in Q2.
Globally, major slowdown in growth is of concern, as the world grappled with the main drivers from the prior quarter; higher inflation, interest rates, geopolitical tensions, and into a headwind of tighter central bank policy (to combat inflation). Looking back at the first half of 2022, while some slowing was expected once the strong rebound from the Pandemic normalised, what was unexpected was the war in Ukraine and its broader economic impact, plus the further lockdowns in China.
Broadening price pressures around the world have pushed global inflation up to over 9%, requiring most central banks to increase interest rates at a faster pace than expected, and inflation continued to move higher in many major economies during the quarter. Most notably, in May, the United States Federal Open Market Committee decided to increase rates by 50bps (to a range of 0.75% to 1.00%), delivering the biggest interest rate increase since 2000 and putting U.S. inflation at a 4-decade high.
Due to these various factors, global equity markets remained under pressure and we saw losses across most financial markets in quarter 2 – equities, nominal bonds, and inflation-linked bonds. Foreign equities were down (-5.4%) in rand terms, with developed markets (-6.0%) underperforming emerging markets (-0.7%) significantly as Chinese equities bounded. Global listed real estate also sold off sharply.
The MSCI Indexes – a measurement of stock market performance in a particular area – were as follows: the MSCI All Country World Index returned -15.7%, and the MSCI Emerging Markets Index produced -11.4%. The Standard and Poor’s 500 (a stock market index usually referred to as simply the S&P 500) fell nearly 9% in three days in June 2022, closing more than 20% below its January highs.
Off the back of a global supply chain trying to recover from disruptions from the global Pandemic, and the continued knock-on effect of Russia’s invasion of Ukraine, we saw strict lockdowns of China’s major metropolitans, such as Shanghai, in quarter 2 due to the highly transmissible variants as part of their zero-COVID policy (which aims to reduce Covid-19 infections to zero). This is in turn aggravated an important part of the global supply chain* – a contributing factor to pushing up inflation around the world (because when goods become more scarce, their prices rise).
*An example of this is Apple and Tesla, which both faced supply-chain issues in China in this quarter due to the lockdowns.
Like many emerging markets, midway through 2022 South Africa finds itself in a precarious position, due to a range of macroeconomic developments over the past two years; COVID-19 pandemic, widespread disruptions to global supply chains, surging global inflation. In quarter 2, local markets were also less protected from these global factors than in Q1, in part because of the fall in commodity prices (commodities are basic goods and materials that are widely used), prediction of slow growth, and higher-than-expected interest rate hikes.
In April 2022, inflation had risen to 5.9% year-on-year, which is very near the top of the SARB’s target – and when SA inflation data for 2021 was released in June, it showed that the average inflation rate for 2021 was 4.5% (higher than that for 2020 and 2019).
In line with global hikes, The South African Reserve Bank (SARB) increased the repo rate by 50 bps in May, the steepest increase since 2016; this takes the bank’s key rate to 4.75% and the prime lending rate of commercial banks to 8.25%. SARB also lowered its GDP growth forecast for 2022 (to 1.7% from 2.0% previously).
South Africa faced three major challenges on the domestic front, putting the country’s fragile economic recovery under added pressure in Q2 – namely:
- Loadshedding: returning with a vergence in 2022, with the renewal of national Stage 4-6 loadshedding. Year-to-date (end of May), there have been 28 24-hour cycle days of loadshedding, compared to around 20 days in 2021.
- Severe flooding in KwaZulu Natal: over two consecutive months (April and May) the torrential rain led to floods and landslides which had devastating effects – not only on loss of lives but public infrastructure damage estimated at R25 billion, leaving many homeless.
- Slow pace of policy reform: even as the Gupta brothers were arrested and the final part of the State Capture Commission Report is handed over, most of the key reforms vital to boost recovery in the short-term and improve long-term growth prospects are still lagging. Effective policy reform implementation is key to recovery and growth.
With basic goods and services becoming more expensive overall, at a time when we haven’t yet fully recovered from the COVID pandemic, consumer sentiment dipped in Q2. After a slight improvement in Q1, the official employment rate for the country declined to 33.9% in the second quarter of 2022.
On the positive side, SA’s Gross Domestic Product (GDP – the total monetary of all goods and services produced within a country’s borders) grew by a welcomed 1.9% in the first quarter of 2022. South Africa’s tax revenue collection continued its strong momentum, with growth averaging around higher than expected (13% so far this year).
In quarter 2 the South African equity markets, as measured by the FTSA/ JSE Capped SWIX (represents 99% of the full market cap value of all eligible securities listed on the Main Board of the Johannesburg Stock Exchange), fell by -10.6%. Resources stocks did poorly (a -21.9% return), financials came under pressure (-15.8%), while industrials proved relatively more resilient and SA listed property fell in line with the equity market (-12.1%).
Looking forward to the third quarter, we are expecting tariff increases across municipal services (like property, water, and electricity) across South Africa’s large metropolitan areas. It’s crucial that our policymakers show commitment to implementing key policy reforms, ahead of ANC conferences in July and December.
Encouragingly, South Africa’s credit rating agencies have recognised the recent improvements in Government’s fiscal position and an improved credit rating outlook is expected.
We’ve also had some positive movement in the energy and communications sectors thanks to the successful auction of Spectrum licenses and approval of additional private sector investment respectively. However, South Africa’s rate of economic growth is expected to remain sluggish for the remainder of the year.
On the global front, there is speculation of the United States moving into a recession, especially if the US Fed’s continues to hike rates aggressively while inflation is high, which will affect the global economy. On the other hand, the inflation shock could inevitably pass (and may have already peaked) prompting the US Fed to turn ‘dovish’ – attempting to encourage rather than restrain economic growth. If inflation moderates from here, it will help markets stabilize and possibly recover lost ground.
China’s efforts (the various lockdowns) to reflate could be rewarded – but Europe may struggle due to energy supply uncertainty.
What you can do (tips for investors)
Investor perspective: Market moving information helps with investor buying or selling decision-making.
Staying invested for the long term will deliver capital growth. While the current market conditions might be both challenging and uncomfortable, we’ve been here before, and we will be here again. One only has to look to history at examples like the 2001 dotcom bubble burst and the 2008 financial crisis to understand that, despite the numerous severe drops, your investment would have continued growing.
Remember that investing is a marathon, not a sprint. It’s important to remain invested through the good and the bad – often the worst days in the market are followed by the best days. If you’re patient, you’ll be amazed by the power of compounding over time!
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