January 2022 economic review

Introduction

Following a strong 2021 for global markets, January was a volatile and shaky month, except for South African markets which continued to advance. Concerns over spiraling inflation, higher interest rates, the shift towards tightening monetary policy by many central banks, and the geopolitical tensions in Eastern Europe weighed on risk sentiment. This resulted in many global stocks retreating from their highs of last year. Despite the US markets recovering slightly during the final trading days of the month, Wall Street suffered its worst start to the year since the Global Financial Crisis (GFC).

US inflation persists and macro-economic data paints a mixed picture

US consumer inflation climbed to 7% year-on-year (y/y) in December, the third consecutive month above 6% and its highest level since 1982 (40 years). Core CPI, excluding food and energy prices rose 5.5% y/y in December, its sharpest rise since February 1991. Inflationary pressure was broad based across goods and services, as disruptions to global supply chains due to COVID-19 continue to cause shortages, ultimately driving up the prices of goods. Manufacturer prices contributed significantly to the high inflation number, as producers in the US are facing supply constraints ranging from input materials to transportation and labour.

At its January meeting, the Federal Reserve (Fed) announced the first rate hike will be at the next meeting on the 16^th of March, and also reaffirmed its plans to end bond purchases in March. The Fed Chair Jerome Powell officially retired the word “transitory” when it comes to inflation but reiterated his pledge to tame inflation.

In terms of US economic data, January’s purchasing managers indices (PMIs) are pointing to slowing economic activity. The ISM Manufacturing Index fell to 57.6 in January (58.8 in December) as record-long lead times, shortages, higher commodity prices and logistical issues weighed on the sector. This reading was the weakest growth in factory activity since September 2020. The rise in Omicron infections has also hurt the retail sector, as US retail sales came in at -1.9% for December, the biggest loss since February 2021 and the end of four consecutive months of strong growth. On a positive note, US 4Q21 GDP growth delivered stronger-than-expected returns at an annualised rate of 6.8% for the quarter, well above the 2.3% GDP growth recorded in 3Q21.

In other interesting news, Apple became the first US company to reach $3 trillion market capitalisation during the month, tripling its valuation in under four years. Apple’s attractive cash flow and several record-breaking quarters of growth in product lines continue to symbolise investor recognition of Apple’s success over the past few years.

UK GDP passes pre-COVID levels

Data released from the Office of National Statistics (ONS) during the month showed the UK economy grew by 0.9% month-on-month (m/m) in November, and in doing so surpassed pre-COVID levels for the first time. Furthermore, it was the highest monthly reading since June last year.

UK inflation rose to 5.4% y/y in December, the third consecutive monthly rise and marks its highest reading in around 30 years. Consequently, this prompted the market to expect rate hikes by the Bank of England (BOE) during the course of the year.

Eurozone

December headline inflation rose to 5% y/y, mainly driven by rising food and energy prices. However, the European Central Bank (ECB) signalled that rates are unlikely to rise in 2022, but it remains flexible in its future policy.

The impact of the latest Omicron wave on the service industry was less than expected since restrictions generally remained limited. Low hospitalisation rates encouraged countries such as Denmark, Spain, and the UK to lift restrictions despite high infection rates. Thus, the consumer confidence in Europe fell marginally to -8.5, and not too far away from the pre-pandemic high of -2.6. Furthermore, the preliminary seasonally adjusted eurozone GDP climbed to 4.6% y/y in 4Q21, in line with market expectations.

 China’s growth slowing

China’s economy slowed down further in 4Q21, with real GDP growth of 4% y/y (4.9% y/y in 3Q21). The resurgence of COVID-19 outbreaks and lockdowns, the troubled property sector and supply bottlenecks in the automobile industry placed strain on consumption, weighing on the world’s second largest economy. Additionally, China’s official PMI fell to 50.1 in January (50.3 in December), hovering around the 50-point mark.

The People’s Bank of China (PBOC) continued its monetary easing efforts during the month, announcing cuts in lending rates. One-year and five-year loan prime rates (LPRs) were cut by 10 and 5 basis points (bps) respectively, as the country attempts to increase lending and ultimately create growth.

South Africa

In local economic data, December annual headline inflation measured by the consumer price index (CPI) rose to its highest level since March 2017 coming in at 5.9% y/y, compared to 5.5% in November. According to Statistics SA, the latest result was driven by higher prices in the food and non-alcoholic beverages, housing and utilities, and fuel sub-sectors. Transport prices rose by a significant 16.8% y/y in December, fuelled by rising petrol and diesel prices. For 2021, headline inflation averaged 4.5% y/y, still in the middle of the SA Reserve Bank (SARB)’s target band of 3-6%.

Local and global inflationary pressures prompted the SARB to raise the repo rate by 25 basis points to 4% during their January meeting, as much anticipated. The Monetary Policy Committee stated they expect the gradual rise in the repo rate to curb inflation expectations. The tone of the SARB was significantly less hawkish than the market had priced for, with one SARB member even voting to keep rates unchanged.

Global markets

Global equity markets started the year on a negative note, as the prospect of tightening monetary policy conditions weighed on stocks, particularly growth stocks, which recorded their biggest monthly underperformance relative to value stocks since 1999. Developed equity markets experienced their worst start to the year since 2016 as the MSCI World Index closed 5.34% down m/m in USD and 8.25% down in ZAR. The increasingly hawkish stance by the Fed and inflation concerns weighed on US stocks, with the S&P 500 (US$) closing the month 5.17% down. European equites also ended the month poorly, with the Euro Stoxx 50((€) returning -2.75% m/m.

Emerging equity markets also had a tough start to 2022, but fared significantly better than their developed market peers as they started to retrieve some of the underperformance suffered to developed markets in 2021. The MSCI Emerging Market Index returned -1.93% m/m in USD and -4.94% in ZAR. Chinese equities, which have been amongst the worst performing global equities for the past year, managed to start the year among the best performing. Unfortunately, geopolitical tension prevented Russian markets from contributing to the emerging market rally.

Local markets

The South African equity market started the year in the “green”, as the FTSE/JSE All Share Index closed the month 0.86% up. The local bourse benefitted from improved sentiment towards emerging markets and a rally in commodity prices. Mining shares were once again amongst the best performers.

Resources led the pack at 3.92% m/m, followed by Financials and Industrials which closed the month 0.48% and 1.89% down respectively. Bonds continued to gain slightly, as the All Bond Index (ALBI) closed with a return of 0.85% m/m. SA listed property had a tough start and was down 2.85% m/m. Cash (STeFI) delivered a moderate return of 0.34% m/m. South African value managers (4.40% m/m) outperformed growth managers (-0.63% m/m), consistent with what occurred globally.

The ZAR experienced strong gains against most major currencies, as the market continued to price in more rate hikes in 2022, which in turn makes South African assets more attractive globally. The ZAR gained as much as 4.66%, 4.15%, 3.17% and 0.06% against the euro, sterling, USD, and Japanese yen.