July 2022 – It’s inflation vs rate hikes

Inflation showed no signs of slowing in the month of July, and its corrosive impact is felt globally. Not all countries experienced the extremes of Turkey, with its consumer inflation now sitting close to 80%, but many major economies are living through generationally high inflation levels. US consumer inflation increased 9.1% from a year earlier, the largest jump since 1981. Year-on-year UK inflation printed at 9.4%, mainly driven by soaring energy prices.

Following shortly on the heels of the June rate hike, the Fed again raised interest rates in the US by 75 basis points in July. Chair Jerome Powell indicated that this might not be the last of the big rate moves, depending on the inflation and employment data released in coming months. He also said that a US recession is unlikely. More rate hikes are expected for 2023, albeit more moderate than those announced during 2022.

Also during July, the dollar and euro reached parity (1 dollar = 1 euro), an event last seen in 2002. Higher energy prices and record inflation are the main culprits for the euro’s slide. Europe is more dependent on Russian oil and natural gas than the US to fuel industries and generate electricity.

Locally, our consumer price inflation reached 7.4% year-on-year, the highest rate since 2009. The main contributors were food and non-alcoholic beverages, housing and utilities, and transport. The SA Reserve Bank responded by front-loading bigger rate hikes to rein in inflation and increased the repo rate by 0.75% to 5.5%. This is the steepest hike since September 2002. Prime has increased to 9%.

In July, markets clawed back some of their losses

During July, all major market indices gave positive returns, clawing back some of their losses of the first half of 2022. The MSCI World index (developed market global equity) gained nearly 10% in rand terms for the month. The FTSE/JSE All Share Index (ALSI) and the local listed property index (SAPY) ended up 4.2% and 8.8% respectively during July. SA bonds (ALBI) returned 2.4% during the month and cash (STeFI) returned 0.43%. The rand weakened 1.7% against the US dollar, but strengthened 0.8% against the euro during July.

Performance measured over the past 12 months mostly positive

Over the past 12 months, most major market indices delivered positive returns. Dollar strength/rand weakness helped South Africans investing abroad, as the rand weakened nearly 14% against the US dollar. Locally, SA equity and listed property gave 4.72% and 9.75% respectively. The ALBI returned 2.88% for the year, and cash gave 4.29%. Internationally, the MSCI World Index returned 3.45% in rand terms over the past 12 months.

World stocks remain the outperformer over 5 years

Over the long term, specifically measured over a five-year time horizon, world stocks offered SA investors the highest rewards. Global stocks as measured by the MSCI World Index returned 14% p.a. on average over the five years to 31 July in rand terms. In comparison, the ALSI returned 8.2% per year. SA bonds gave 8% per year and cash 5.9%. Listed SA property (the SAPY) is underperforming other asset classes over the long term at -6.4% per year, on average.

Table 1: Total returns to 31 July 2022

Source: Morningstar | Total returns annualised to 31 July 2022

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