Strong returns despite rising interest rates

It’s hard to call the direction of US inflation at the moment. On the one hand, easing supply chains are applying downward pressure to US prices. On the other hand, American consumers are spending at a healthy rate, not exactly curbing inflation. Cost of shipping is viewed as a measure of supply chain stress, and this has fallen sharply in the past year, easing the way for lower inflation rates. But the US government data on retail sales (mostly consumer spending on goods) show that spending is up 8.3% from a year earlier, despite significantly higher interest rates and the pressure on US households. All data considered, the Fed raised the federal funds target rate by 75 basis points for a fourth straight meeting, to the 3.75-4% range.

In the United Kingdom, inflation has hit a 41-year high. Consumer prices were up 11.1% from a year earlier, and up 2% from the previous month.

In China, mainly as the result of the strict lockdowns accompanying the country’s zero-Covid policy, citizens took to the streets to protest. This is hurting the outlook for growth and energy demand. As  a result, the price of oil dropped to $81/barrel during November.

At the same time, the threat of a recession in several world markets has not subsided and company lay-offs are becoming more common. Meta Platform, for example, announced that about 11 000 jobs will be cut – 13% of the Meta workforce.

Also during November, Amazon became the world’s first public company to have lost a trillion dollars in market value as high inflation, rising interest rates and disappointing earnings updates triggered a historic selloff in this stock. During the month, it reached a market value of $879 billion, compared to its record close at $1.88 trillion in July 2021.

In SA, headline inflation climbed to 7.6% from a year earlier, compared with 7.5% in September. Lower petrol prices saw the fuel index decline for a third consecutive month. This took the annual rate for fuel to 30.1% in October from 34.1% in September. The MPC decided to increase the repo rate by 75 basis points, leaving it above its pre-pandemic level.

SA makes a comeback in November

SA markets continued their comeback in November. Following a strong October, the FTSE/JSE All Share Index (ALSI) and the local listed property index (SAPY) gave 12.3% and 6.3% respectively in November. SA bonds (ALBI) returned 3.9% during the month and cash (STeFI) returned 0.51%. The rand strengthened 7.5% against the US dollar and 3.6% against the euro in November. The MSCI World index (developed market global equity) was a less lucrative choice – mainly due to the weaker dollar/stronger rand – and the index lost 1.1% in rand terms for the month.

Over the past year, most markets are lagging inflation

Over the past 12 months, year-on-year SA consumer inflation sits at 7.5%. Thanks to a strong bounce over the past two months, the ALSI, at 11.1%, is now comfortably beating year-on-year inflation. But, it’s the exception. Listed property gave 7.2%, and SA bonds and cash gave 6.4% and 5% respectively. The MSCI World Index returned a disappointing -5.4% in rand terms over the past 12 months.

World stocks remain the outperformer over 5 years

Looking at performance over the past five years, world stocks delivered the highest returns to SA investors. Global stocks as measured by the MSCI World Index returned 12.2% p.a. on average over the five years to 30 November – in rand terms. In comparison, the ALSI returned 8.4% per year. SA bonds gave 8.9% per year and cash 5.8%. Listed SA property (the SAPY) is underperforming other asset classes over the long term at -6.7% per year, on average.

Table 1: Total returns to 30 November 2022

Source: Morningstar | Total returns annualised to 30 November 2022