October 2021 economic review
October saw markets trend higher after a weaker September, as a broad market rally saw most major global indices ending the month higher, including South Africa. Despite a stronger month for markets, there remain some ongoing concerns. The inflation debate remained in the spotlight, weighing on investor sentiment, especially due to concerns that inflation will not be transitory after all. The COVID-19 Delta Plus (another variant of COVID-19) encouraged fear, especially in the UK which recorded a large increase in COVID-19 cases despite a relatively high vaccination level, with the Delta Plus variant blamed for the spread. Finally, there is a concern that increased regulations by Chinese authorities will see the country’s economy deteriorate and bring the global economy down with it.
Elon Musk in the spotlight once again
Elon Musk-run electric motor vehicle company Tesla joined the elite club of $1 trillion market capitalisation in the month of October, becoming the fifth US company to reach the milestone (Apple, Microsoft, Amazon and Alphabet are the others). Tesla was a standout performer (around 44% up m/m), with results exceeding expectations as it announced record margins and better-than-expected volumes, having thus far dealt with the global chip shortage with ease.
In other interesting news, the director of the World Food Programme (WFP), David Beasley, called out the world’s wealthiest to “step up” and pledge money to the cause of solving world hunger. In response, Elon pledged to donate $6 billion (small percentage of his wealth) to the WFP, if the organisation can show it would in fact solve world hunger, using transparent and open source accounting.
Inflation concerns continue to dominate US markets
The inflation debate remained the main focus weighing on investor sentiment for the month, especially after the US Federal Reserve (Fed) Chairman Jerome Powell commented, “The risks are clearly now to longer and more persistent bottlenecks and, thus, to higher inflation” during the Fed’s monthly meeting in October.
The US Congress avoided the prospect of a technical default by shifting their debt ceiling crisis to December, but stronger economic data, particularly in retail spending, kept the prospect of imminent monetary policy normalisation.
In terms of US economic data, the Conference Board’s consumer confidence index rose in October after three prior consecutive monthly declines. Furthermore, the US third quarter (3Q21) GDP results came in at 2% quarter-on-quarter, slightly behind expectations of 2.6%. Economic activity has decelerated on the back of supply concerns and a resurgence of COVID-19 cases due to the Delta variant over the quarter. On a positive note, personal consumption expenditure (PCE) which accounts for around 75% of US economic activity came in ahead of expectations at 1.6%, largely due to higher-than-expected imports.
The US labour market showed signs of recovery in the month with a larger-than-forecasted payrolls gain, indicating higher wages and greater progress in filling millions of vacancies as the effects of the COVID-19 Delta variant faded. This resulted in the unemployment rate falling to 4.6% while labour-force participation remained unchanged.
European GDP results positive despite persisting inflation & supply chain concerns
Europe’s economy continued to show signs of recovery from the pandemic-induced recession, with preliminary Eurostat data showing a 2.2% q/q increase in the 19-country euro area and a 2.1% q/q increase in the 27-member European Union (EU). However, eurozone inflation recorded a new 13-year high in October on the back of surging energy costs. Headline inflation came in at 4.1%, ahead of consensus forecasts of 3.7%.
Another milestone for the cryptocurrency market
The first US bitcoin futures exchange-traded funds (ETFs) launched in the final week of October, allowing investors to buy and sell the assets outside of cryptocurrency exchanges. The ProShares Bitcoin Strategy ETF ($BITO) saw one of the biggest first days on record for ETFs from crypto-hungry investors. Subsequently, bitcoin and ethereum jumped to all-time highs.
Rolling electricity blackouts impact local economy
September annual headline inflation, as measured by the consumer price index (CPI) was released this month, coming in at 5% for September compared to August’s 4.9% print. The increase was driven by food and non-alcoholic beverages, housing and utilities, and lastly transport categories. The South African Reserve Bank (SARB) stated that the increase in inflation prompts the need for interest rates to start normalising, implying a rate hike in the last quarter of 2021 and one in every quarter next year.
Eskom increased rolling blackouts in October, moving to Stage-4 load shedding in the last week of the month and cutting around 4 000 megawatts from the national grid due to a lack of power. This continues to impact local businesses and the SA economy.
On the pandemic front, SA continued to experience a decrease in daily COVID-19 cases, once again highlighting the importance and effectiveness of vaccines. The Department of Health data showed at 31 October around 22.4 million vaccines have been administrated compared to around 17.9 million at 30 September.
China’s disappointing GDP results comes as no surprise
China’s 3Q21 GDP grew at a disappointing 0.2% quarter-on-quarter(q/q), missing consensus expectations and is down from the 1.2% q/q increase experienced in 2Q21. This quarterly result marked the country’s weakest growth since the start of the COVID-19 pandemic.
The slowdown in economic growth comes on the back of several factors, including recent power shortages, difficulties in the property sector, strict regulations on sectors from technology to education and COVID-19 outbreaks largely due to the delta variant.
Furthermore, China’s official manufacturing purchasing manager’s index (PMI) contracted for the second consecutive month, shrinking to 49.2, from 49.6 in September, under pressure from persistently high raw material prices and decreased domestic demand. The 50-point mark separates expansion from contraction. However, China’s official composite PMI (includes manufacturing and services activity) closed at 50.8, thus representing expansion.
Global equity markets got back to winning ways in October, as developed equity markets recorded their best month since November last year. The MSCI World Index closed 5.59% up month-on-month (m/m) in USD and 6.68% in ZAR. US stocks were supported by a strong start to the 3Q21 earnings season, with more than 80% of companies exceeding earnings expectations, driving the S&P 500 (USD) to a new peak, closing the month 7.01% up. US energy stocks were once again standout performers in October, supported by a rally in the price of Brent crude oil. European equities also closed the month on a strong note, with the Euro Stoxx 50 (€) up 5.19%.
Emerging equity markets lagged developed market peers, as the MSCI Emerging Market Index returned 0.93% m/m in USD and 1.97% in ZAR. US-listed Chinese stocks, which lost one-third of their value in the first nine months of the year, bounced back, supported by Chinese tech giants’ recovery including Tencent (around 11% m/m). Unfortunately, the strong performance was offset by a poor month from Brazilian and Turkish shares.
The South African equity market followed global markets and bounced back from September losses, closing the month with strong gains. The FTSE/JSE All Share Index closed at 5.15% m/m, with mining shares the best performers for the month, particularly metal stocks.
All major sectors finished the month in positive territory for October. Resources led the pack at 8.44% m/m, on the back of stronger commodity prices driving the share price of miners. Industrials and financials closed at 6.80% and 3.49% m/m respectively. The Industrials sector was given a boost with Naspers and Prosus delivering a solid performance (around 7.5% m/m in aggregate), following Chinese tech stocks. SA listed property lost some ground in October, closing the month at -1.69%, while cash (STeFl) delivered a moderate return of 0.32%. South African growth managers (5.81% m/m) outperformed value managers (3.64% m/m).
The ZAR continued to lose ground against the USD, closing 1.02% down m/m, in yet another rollercoaster month. Furthermore, the ZAR lost as much as 2.64% and 0.87% against the euro and sterling but managed to finish the month stronger against the Japanese yen at 2.20%.