The quarter started with worries in regards to the shift in US Federal Reserve rhetoric, which implied that they not contemplate larger inflation as being transitory; the implication being that the outlook for financial coverage had turn out to be extra hawkish. In an additional dent to sentiment, geopolitical pressure between Russia and Ukraine culminated in a full-blown invasion of Ukraine, due to Russia’s sturdy opposition to Ukraine’s needs of becoming a member of NATO.
The remainder of the world responded with financial sanctions on Russia, and power costs skyrocketed, with Russia being a key oil producer, a significant provider of pure gasoline to Europe, and likewise an vital provider of agricultural commodities to creating nations.
This additional stoked inflation fears, whereas additionally denting the worldwide financial outlook, which was later additionally threatened by renewed COVID considerations in China. Again residence, the surroundings was extra benign, with the fairness market proving resilient, the economic system muddling alongside, and the Nationwide Finances in February instilling confidence.
Financial backdrop
Initially of the 12 months the worldwide economic system appeared poised to develop comfortably at above-trend tempo as soon as once more, however after the occasions of this quarter, there’s enough grounds to be extra cautious on the outlook.
Firstly, financial coverage appears set to tighten extra aggressively than initially anticipated, in response to persistently excessive inflation.
Secondly, the battle in Ukraine is having far-reaching oblique penalties, regardless of Russia and Ukraine collectively making up solely 3.5% of world GDP, and solely 0.2% of G7 exports. And lastly, the latest re-introduction of lockdowns in China are as soon as once more proving disruptive to international provide chains.
The important thing query is “how a lot can we anticipate development to gradual?”. Are we going through a stagflation state of affairs of slower development, excessive inflation, and doubtlessly rising unemployment, or even perhaps a recession?
One of the vital dependable recession indicators, being the US yield curve (particularly the distinction between 10-year and 2-year bond yields) is flashing pink, with the curve having inverted not too long ago, which is including to market worries. Fluctuations within the enterprise cycle are regular, however what makes this time distinctive is that there’s restricted scope for coverage intervention from central banks and governments, given the previous decade of ultra-stimulative coverage.
In consequence, central banks all over the world, together with in SA, are mountaineering rates of interest, and the US Federal Reserve (US Fed) is getting ready to shrink its stability sheet, which has swelled by asset purchases, known as Quantitative Easing. It is a headwind to development at a time when international commerce disruptions, together with the influence of Russian sanctions, are a threat to inflation.
That is most evident within the sharp rise in power costs, the place Russia is a key participant, traditionally offering 12% the world’s oil. It’s too quickly to inform how all this may play out, however what is obvious is that there are extra draw back dangers than upside at this level.
Whereas the crosscurrents in international macro circumstances are sturdy, the macro surroundings in SA is proving resilient, albeit a low development regular state.
Low single digit development is persisting, and the SARB’s response to modestly larger inflation has been gradual charge hikes. The ABSA Buying Managers Index not too long ago reached its highest stage since COVID-19, confirming comparatively energetic financial exercise. The mining sector is benefitting from excessive commodity costs, which has been constructive for our commerce stability and in flip for the rand. Sturdy commodity costs have additionally been useful for the fiscus, by larger taxes on mining sector earnings, with the Nationwide Finances in February exhibiting an enchancment within the sovereign debt outlook.
Regardless of all of this, SA relies on the worldwide economic system, and we might not be insulated from any pronounced international financial weak spot.
Reza Hendrickse is a portfolio supervisor at PPS Investments