August 2022 – US leads markets from Jackson Hole

With the world wondering whether it’s back to the 1970s and hyperinflation, all eyes were on Jackson Hole, where central bankers, policymakers, economists and academics have been meeting for more than three decades to discuss economic policy. During this year’s Economic Policy Symposium, held in the last week of August, Fed Chair Jerome Powell crashed all hopes of interest rate ‘normalisation’ and rate cuts next year. He warned that restrictive monetary policy will be in place ‘for some time’. The Nasdaq 100 tumbled more than 4% on the day of Powell’s remarks and bond traders are now pricing in a 75% chance that the Fed will raise rates again in September.

While US Inflation fell from 9.1% year-on-year to 8.5%, inflation in other major economies is not yet cooling down. UK inflation accelerated to the highest in 40 years, at 10.1%, and euro zone inflation hit a new record high in August of 9.1%, according to flash figures from Eurostat, with high energy prices the main driver. More dark clouds are hanging over Europe: the purchasing managers’ indices for the euro area’s four largest members all indicated a contraction in economic activity.

In Asia, Tencent might be a harbinger of things to come. The tech giant logged its first-ever revenue decline after its workforce shrank almost 5%. PMI data showed that China’s factory activity also unexpectedly contracted in July.

Locally, SA PMI fell to 47.6 points in July from 52.2 in June, falling below the 50-point mark that separates expansion from contraction for the first time since July 2021. SA’s unemployment rate improved slightly to 33.9% in the second quarter of 2022, from 34.5% in the first quarter, led mainly by job gains in the community and social services, trade, finance and construction sectors. Our headline consumer-price index rose 7.8% year-on-year, compared with 7.4% y/y the previous month.

Jackson Hole turns August returns red

Markets were doing fine during August – until Powell warned that interest rates could stay higher for longer than expected. In response, most major market indices ended in the red for August 2022. The MSCI World index (developed market global equity) lost nearly 2% in rand terms for the month. The FTSE/JSE All Share Index (ALSI) and the local listed property index (SAPY) lost 1.8% and 5.4% respectively during August. SA bonds (ALBI) returned 0.31% during the month and cash (STeFI) returned 0.45%. The rand weakened 2.3% against the US dollar and 0.9% against the euro during August.

Performance measured over the past 12 months small but positive

Over the past 12 months, most major market indices delivered positive returns, even though small. Dollar strength/rand weakness helped South Africans investing abroad, as the rand weakened nearly 18% against the US dollar, ‘cancelling out’ the negative dollar return on the MSCI World. As a net result, the MSCI World Index returned 0.1% in rand terms over the past 12 months. Locally, SA equity and listed property gave 4.6% and -3.4% respectively. The ALBI returned 1.48% for the year, and cash gave 4.43%.

World stocks remain the outperformer over 5 years

Measured over a five-year period, world stocks delivered the highest returns to SA investors. Global stocks as measured by the MSCI World Index returned 13.9% p.a. on average over the five years to 31 August in rand terms. In comparison, the ALSI returned 7.2% per year. SA bonds gave 7.8% per year and cash 5.6%. Listed SA property (the SAPY) is underperforming other asset classes over the long term at -7.6% per year, on average.

Table 1: Total returns to 31 August 2022

Source: Morningstar | Total returns annualised to 31 August 2022

Image Source: commons.wikimedia.org (originally posted to Flickr by Federal Reserve) | Author: Federalreserve