November 2021 economic review
Global markets drifted higher at the start of November but once again COVID-19 concerns later in the month caused a reversal of risk appetite and resulted in most equity markets closing lower for the month, surprisingly excluding South Africa. These concerns stemmed from an increase in COVID-19 cases, particularly in Europe and the UK, and the discovery of the latest COVID-19 variant (Omicron). The news of the Omicron variant triggered a global shift away from risk assets. Finally, inflation continues to be in the spotlight for most countries, especially after US inflation came in ahead of expectations, contributing to the risk-off tone experienced in the month.
US consumer confidence falls as inflation persists
Inflation continued to rise in the US with the Consumer Price Index (CPI) jumping to 6.2% year-on-year(y/y) in October, on the back of supply chain disruptions, increasing energy costs and wage increases. This result released in November also marks its highest reading in 31 years.
The US government officially announced the country’s consumer confidence index fell 2.1 points to 109.5 in November, indicating consumers in the country are less confident about the economy’s short-term outlook for their employment and income prospects. Consumer spending accounts for around two-thirds of the country’s economic growth. Lynn Franco, the senior director of Economic Indicators at the conference board stated, “Concerns about rising prices and, to a lesser degree, the Delta variant were the primary drivers of the slight decline in confidence.”
On the policy front, Jay Powell was reappointed for another four-year term as Federal Reserve (Fed) chairman. With the US economic recovery underway and inflation continuing to rise, the Fed announced that bond-buying would be slowed by $15 billion per month during their November meeting.
Finally, Joe Biden signed a long awaited $550 billion bipartisan infrastructure bill in order to upgrade America’s roads, bridges, railways and deploy electric vehicle charging stations across the country.
Europe produces mixed economic data
The euro area purchasing manager index (PMI) flash survey rebounded to 55.8, 1.6 points up month-on-month (m/m) after three consecutive months of decline prior to this month. However, there were some diverging trends, as the French Insee Business survey increased while the German IFO business climate index dropped. This divergence can be partially explained by the fourth COVID-19 wave, which has been much more severe in Germany compared to France. Several countries in Europe have already reintroduced new mobility constraints to curb the spread of the virus. Such measures, together with November headline eurozone inflation rising to 4.9%, have weighed on consumer sentiment, similarly to the US. This latest inflation print compared to October’s 4.1% shows the fastest pace of price increases since the establishment of the single currency union over 20 years ago and is likely to place pressure on the European Central Bank (ECB) to reduce its monetary stimulus programme.
UK economic growth disappoints
UK GDP growth slowed sharply in the third quarter of 2021 to 1.3% compared to 5.5% in the second quarter, largely due to surging COVID-19 infection rates, rising prices and global supply constraints worsened in the UK by post-Brexit trade restrictions. Whilst the UK is making progress, its GDP remains 2.1% below its pre-pandemic level.
Furthermore, the Bank of England (BOE) decided to keep rates on hold in November, surprising most market participants, subsequently causing the sterling to lose ground against all major currencies. Inflation continues to surge with the CPI increasing to 4.2% y/y in October, the highest reading since December 2011. With yet another large jump in inflation, a rate hike is expected at the BOE’s next monthly meeting.
China beginning to show signs of economic recovery
Macroeconomic data in China released this month showed an improvement in external demand and domestic activity. China’s exports continued to surprise to the upside for the third month in a row, with growth of 27% y/y in October, driven by strong demand from Europe. On the domestic front, retail sales and industrial production exceeded expectations, rising 4.7% and 3.5% y/y respectively in October.
Power shortages were eased in November, leading to an improvement in manufacturing production as China’s official manufacturing PMI rebounded slightly to 50.1 for the month, indicating its first expansion in manufacturing activity for two months. Despite this it’s still the third-lowest level in 21 months.
SA economic prospects and discovery of the Omicron variant
In local economic data, October annual headline inflation measured by the consumer price index (CPI) printed above the 4.5% midpoint for the sixth consecutive month coming in at 5% y/y in October, and unchanged from September. Food prices have been a key driver of SA’s higher inflation prints over the past few months but for October, the food and non-alcoholic beverages inflation categories eased for a second consecutive month at a seven-month low of 6.1%. Despite its disinflationary impact on the headline print it was offset by fuel prices rising to new record levels.
In a still fragile economy, the South African Reserve Bank (SARB) in its November meeting raised the repo rate by 0.25% in line with market expectations. The SARB governor stated the decision was made in response to increased inflation risks over the medium term. November also saw further rolling blackouts continuing to negatively impact local businesses and SA’s economic growth, ultimately contributing to the SARB’s decision to revise its GDP growth prospects lower.
Local government elections results were released, with the ANC securing around 10.7 million votes (46%), which was below the 50% mark for the first time in democratic SA history.
On the pandemic front, the headline news was the discovery of the Omicron strain identified by SA scientists, with fears of a resurgence or fourth wave in December as daily cases suddenly rose. The UK and other countries have frustratingly put SA and other Southern Africa countries back on their red list, with flights being temporarily banned. These latest restrictions come just two months after the UK had removed SA from its travel red list, placing significant pressure on the tourism industry once again.
The latest variant (Omicron) discovered late in the month weighed on global equity markets, which ended the month in negative territory. However, due the rand falling sharply, SA investors experienced positive returns in global equities. The MSCI World Index closed 2.3% lower month-on-month (m/m) in USD and 3% in ZAR. US stocks finished the month in the red, with US bank stocks among the worst performers as the S&P 500 (US$) closed the month 0.70% down. European equities closed the month on an even weaker note following a resurgence in COVID-19 cases; the Euro Stoxx 50(€) was down 4.30%.
Emerging equity markets continued to lag developed market peers, as the MSCI Emerging Market Index returned -4.14% m/m in USD and 1.06% in ZAR. Chinese equities struggled once again, although Russia was comfortably the worst performing major, on news that a build-up of Russian troops on the Ukraine border may reignite geopolitical tensions.
The South African equity market was one of the few global exchanges to end the month in the “green”. The FTSE/JSE All Share Index closed at 4.47% higher m/m, with gold miners the star performers.
All major sectors finished the month stronger for November. Resources led the pack once again at 6.77% m/m, on the back of strong gains from mining shares. Industrials and Financials closed the month at 6.44% and 4.59% higher respectively. Bonds recovered slightly after a few months of negative returns, as the All Bond Index (ALBI) closed 0.66% higher m/m. SA listed property also got back to winning ways, closing the month 2.16% up, while cash (STeFI) delivered a moderate return of 0.32%. South African growth managers (5.56% m/m) outperformed value managers (1.91% m/m) for the second consecutive month.
The ZAR continued to lose ground against most major currencies, with concerns over the present Omicron variant in South Africa contributing to its downfall. The ZAR lost as much as 5.14%, 2.47%, 1.72% and 0.42% against the USD, euro, sterling, and Japanese yen respectively.