September 2022 – Struggling SA economy takes a step back

There was not much to be sanguine about in September. SA second-quarter GDP data showed that our economy contracted 0.7% compared with downwardly revised growth of 1.7% in the previous quarter. The lower output was due mainly to the worst flooding in almost three decades and persistent power outages. Data released two days later showed more bad news: SA’s current account balance dropped from a surplus of 2.4% of GDP in the first quarter to a deficit of 1.3% of GDP in the second quarter.

Also during September, stage 6 loadshedding once again became an everyday reality for South African households and businesses, and Eskom group chief executive André de Ruyter announced that the utility provider would be buying additional energy from existing independent power producers to address this stumbling block in the way of economic growth.

On the inflation front, there was some relief as South Africa’s headline consumer inflation fell to 7.6% year on year. Nonetheless, the MPC hiked the repo rate by 75 basis points to 6.25%. Prime now stands at 9.75%, substantially higher than the 7% figure of a year ago.

Central banks and governments worldwide are combatting crises

In the US, the threat of stagflation still lurks. Despite consumer inflation being down slightly from 8.5% the previous month (now 8.3%), this is still debilitatingly high and looking longer term, US inflation projected and derived from the inflation swap curve is about 2.5%, higher than historically targeted. In response to the current surge in inflation, the Fed raised its target interest rate by 0.75% to a range of 3-3.25% and signalled more large increases to come. Projections show the federal funds rate peaking at 4.60% in 2023. Rate cuts are not foreseen until 2024.

Also during September, the European Central Bank raised interest rates across the eurozone by a record 0.75% to combat their double-digit inflation, despite a looming recession. In August 2022, the producer price index for industrial products increased by 45.8% compared with August 2021. Energy prices were the main driver. Adding fuel to fire, Russia shelled the Zaporizhzhia nuclear power plant on 21 September, damaging one of the power units. Germany responded rapidly by nationalising Uniper SE in a historic move to avoid an escalation of the existing energy crisis in Europe.

The UK has not been spared the turmoil of spiraling inflation and rising interest rates. On top of that, Britons are living through a change of the guard both at Buckingham Palace and 10 Downing Street. The British pound sank to an all-time low, as investors were startled by the  intentions of the new UK chief finance minister, Kwasi Kwarteng, to cut taxes at a time when the UK is sitting with 9.9% inflation. Before month-end, the Bank of England halted its plans to sell its gilt. Instead, it started buying back long-dated bonds to calm down the market and avert a crisis for defined benefit pension funds in the country. (Plunging bond prices mean the assets backing these pensions are rapidly disappearing.) Before the policy-reversal announcement, yields on UK government bonds were heading for their sharpest monthly rise in decades, pushing down UK bond prices.

Hello again, September effect

September is the month in which the original Black Friday occurred in 1869. It’s also the month in which, from 1928 through 2021, the S&P 500 index averaged a negative return, the so-called ‘September effect’. This year, stock markets again saw a substantial decline. The MSCI World index (developed market global equity) lost 4.4% in rand terms for the month, and more than 9% in dollar terms. The FTSE/JSE All Share Index (ALSI) and the local listed property index (SAPY) lost 4.1% and 6.3% respectively in September. SA bonds (ALBI) returned -2.1% during the month and cash (STeFI) returned 0.46%. The rand weakened 5.45% against the US dollar and 2.7% against the euro in September.

Over the past year, markets are lagging inflation

The past 12 months have been disappointing in most markets. The MSCI World Index returned -4% in rand terms over the past 12 months. Locally, SA equity and listed property gave 3.55% and -8.75% respectively. The ALBI returned 1.48% for the year, and cash gave 4.59%.

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 11.5% p.a. on average over the five years to 30 September in rand terms. In comparison, the ALSI returned 6.5% per year. SA bonds gave 7.1% per year and cash 5.8%. Listed SA property (the SAPY) is underperforming other asset classes over the long term at -9% per year, on average.

Table 1: Total returns to 30 September 2022

Source: Morningstar | Total returns annualised to 30 September 2022