May 2022 – big rate hikes are back

It’s hardly a surprise that, after years of ultra-low or even negative interest rates in some countries, combined with pandemic relief cheques in the hands of US citizens, inflation had to make a comeback. Then the unexpected followed, a Russian offensive on Ukraine turf, of which the global supply chain disruption sent out more inflationary ripples towards energy, wheat and cooking oil importers.

The inflation data released for the US in May showed that the annual rate of inflation in April was still a staggering 8.3%, even though it’s down slightly from 8.5% in March. It remains at a level unseen since the 1980s. Lower-income US citizens, for whom food makes up a bigger part of their monthly spend, especially would have felt the 9.4% increase in the official food basket’s prices over the past year. It’s the biggest 12-month increase since April 1981. And frequent-flyer American citizens would have noticed that air fares were up 40% over the last three months.

In the UK, the pain of rising prices is also felt. UK inflation is currently 7%, but the Bankto forecast is for more than 10% later this year. Drivers of this soaring figure are higher energy prices, a weakening pound, trade restrictions, a decade of modest inflation going into the pandemic, expectations for higher inflation in a year’s time and a tight labour market.

With disturbingly high inflation, interest rates have to rise. In the US, the Fed announced the biggest interest rate increase since 2000 during the month of May – 50 basis points. The Fed also signalled that this is now the pace at which it will continue hiking rates.

Locally, the South African Reserve Bank also hiked the repo rate by 50 basis points, the biggest increase since 2016. The rand strengthened slightly on the news. The latest interest rate adjustment takes the bank’s key rate to 4.75% and the prime lending rate of commercial banks to 8.25%.

Markets continue their ‘power loss’ in May

With higher interest rates, the valuations of most stocks need to be reset – lower. In addition, the Russia-Ukraine conflict has also dampened the global growth outlook, and hence the potential for strong company earnings. For the fifth consecutive month, global markets had a negative rand return. The MSCI World index (developed market global equity) lost 1.4% in rand terms for the month. The FTSE/JSE All Share Index (ALSI) ended down 0.36% for the month. The local listed property index (SAPY) eked out 0.05%. SA bonds (ALBI) gained 1.01% during the month and cash (STeFI) returned 0.39%. After currency weakness in April, the rand strengthened 1.47% against the US dollar and ended at much the same level against the euro at the end of May as end-April.

Over the past 12 months SA property had the strongest performance

Over the past 12 months, all major market indices delivered positive returns. The local listed property market was the best performing main asset class at 15.54%, followed by SA equity at 11.03%. The ALBI returned 5.59% for the year, and cash gave 4.09%. The rand weakened 13.58% against the US dollar but strengthened 0.48% against the euro. Looking towards international markets, the MSCI World Index gave South African investors 8.11% 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 remain on top. Global stocks as measured by the MSCI World Index returned 13.47% p.a. on average over the five years to 31 May in rand terms. In comparison, the ALSI returned 9.79% per year. SA bonds gave 8.25% per year and cash 5.98%. Listed SA property (the SAPY) is underperforming other asset classes over the long term at -5.23% per year, on average.

Table 1: Total returns to 31 May 2022

Source: Morningstar | Total returns annualised to 31 May 2022