October 2022 – US growth but turmoil in Europe

Turmoil in Europe prevailed in October. The Ukraine-Russia war is escalating, devastating lives in the region and casting a cloud of uncertainty over Europe. In the UK, Liz Truss resigned as prime minister and leader of the Conservative Party after only 45 days in office, in the wake of a mini Budget that nearly broke the UK bond market. Since her departure, the new Chancellor of the Exchequer, Jeremy Hunt, announced the reversal of tax and fiscal policy, leading to an improvement in bond prices, a rise in equity prices, and the appreciation of the pound.

Inflation continues to accelerate in the Eurozone with CPI up 9.9% from a year earlier, a record high. In the US, consumer prices are up 8.2% from a year ago. Locally, CPI currently stands at 7.5%.

Also in the US, the economy expanded at an annual rate of 2.6% in the third quarter, according to the ‘advance’ estimate released by the Bureau of Economic Analysis. Consumer spending was up a more modest 1.4%. Spending on goods was down 1.2% while spending on services was up 2.8% – showing consumers reverting to pre-pandemic spending patterns. The weakest component of real GDP growth was residential investment, declining for the sixth consecutive quarter, reflecting the dampening effect of rising mortgage interest rates.

SA collects more revenue than forecast

In the last week of October, Finance Minister Godongwana delivered some good news during this year’s mini Budget speech. In February this year it was expected that the state’s expenses would exceed its revenue by 6% of GDP; that figure has now been revised to 4.9% of GDP due to better-than-expected tax revenue.  Over the medium term, the main Budget deficit narrows more sharply than previously expected, to reach -3.3% of GDP by 2025/26.

The state still battles with its balance sheet, though, which continues to act as a drain on government resources. Additional funds are now being allocated to SANRAL, Transnet and Denel. The Treasury also noted the Land Bank remains in ‘financial distress’. Moreover, the Treasury indicated it expects to take over a portion of Eskom’s debt. From one perspective, it’s imperative that the government stabilises the financial position of Eskom. That said, this development is an illustration of the continued large drain of state-owned enterprises on the resources of the state.

Markets bounce back in October

After a marked correction the previous month, markets bounced back in October. The MSCI World index (developed market global equity) gained 9.6% in rand terms for the month. The FTSE/JSE All Share Index (ALSI) and the local listed property index (SAPY) gave 4.9% and 11% respectively in October. SA bonds (ALBI) returned 1.1% during the month and cash (STeFI) returned 0.51%. The rand weakened 2.25% against the US dollar and 3.2% against the euro in October.

Over the past year, markets are lagging inflation

Over the past 12 months, year-on-year SA consumer inflation sits at more than 7%, a figure markets – despite the October bounce – could not keep up with. The MSCI World Index returned -1.4% in rand terms over the past 12 months. Locally, SA equity and listed property gave 3.3% and 3% respectively. The ALBI returned 3.1% for the year, and cash gave 4.8%.

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 12.1% p.a. on average over the five years to 31 October in rand terms. In comparison, the ALSI returned 6.2% per year. SA bonds gave 7.9% per year and cash 5.8%. Listed SA property (the SAPY) is underperforming other asset classes over the long term at -7.5% per year, on average.

Table 1: Total returns to 31 October 2022

Source: Morningstar | Total returns annualised to 31 October 2022