October 2022 Economic Review
October lived up to its reputation as a ‘bear market killer’, posting one of the best months for stocks in history. After two months of negative returns, the majority of global markets, as well as our local markets, rebounded. Major economies still faced inflationary fears, the impact of ongoing geopolitical tension, the energy crisis in Europe, more hawkish comments from the US Federal Reserve (Fed), COVID-19 cases in China climbing once again, and the outcome of the 20th National Congress of the Communist Party of China (CCP), impacting sentiment.
Despite this, we saw stocks being supported by better-than-expected earnings by 75% of companies. Gains were made across all sectors, with energy stocks broadly stronger following particularly robust earnings. Some retailers were especially weaker, with investors anticipating the compression of consumer spending. US tech companies were the biggest losers for the month after posting weak third-quarter earnings. Meta ended 31% down m/m after CEO Mark Zuckerberg pledged to forge ahead with spending on the Metaverse.
US consumer sentiment rises, but inflation concerns remain
After weeks of declining, we saw US equities recovering during October, even though the Fed confirmed that tighter monetary policy is still needed to contain elevated inflation.
That said, economic data varied. Industrial data looks set to weaken further at the start of Q4, with the composite purchasing managers’ index (PMI) falling from 49.5 to 47.3 in October (a reading below 50 denotes economic contraction). The US unemployment rate fell to pre-COVID levels at 3.5%, and rising wages were not enough to encourage Americans to return to the labour market.
Although the outlook for inflation continued to rise and business conditions deteriorated, consumer sentiment increased in October. We saw US headline CPI year-on-year (y/y) coming in at 8.2% in September, above the market consensus of 8.1%. The University of Michigan Index of Consumer Sentiment (MCSI) was 59.9, up from 58.6 in September.
In terms of activity, the US ISM Manufacturing Index fell to 50.9, its lowest level in factory activity since the sector contracted in May 2020. The US economy grew more than consensus expectations to 2.6% annualised in the third quarter on the back of a narrowing trade deficit and increased consumer and government spending. The GDP print marks the first quarter of positive US growth in 2022, temporarily easing recession fears.
China’s economy faces challenges
The Chinese CPI rose 2.8% y-o-y in September versus 2.5% in August. The Chinese economy expanded a seasonally adjusted 3.9% in the three months to September 2022, beating the market forecast of 3.5% and shifting from a revised 2.7% contraction in the previous quarter.
Despite the rebound, the Chinese economy is still facing changes on multiple fronts at home and abroad, including the COVID-zero strategy, a moderation in exports, a persistent property crisis, and the risks of a global slowdown due to the tightening path from major central banks.
During the month markets fell on concerns that Xi may continue with policies focused on reducing China’s exposure to foreign interests and influence at the expense of economic growth, with potentially negative consequences for private companies.
Energy crisis fears ease in Eurozone
In Europe, growth momentum continued to soften as both the Euro area and UK composite PMIs came lower than consensus expectation in October at 47.1 and 47.2, respectively. Eurozone headline inflation reached another record high of 10.7% y-o-y in October versus 9.9% in September. As a result, the European Central Bank announced a rate increase of 75 basis points at its October meeting. Germany, the region’s largest economy, saw a massive increase in its inflation rate to 11.6% y/y, while France’s inflation rate increased to 7.1% y/y in October versus 6.2% in September.
The European Commission proposed new regulation to cap energy prices and introduce measures such as joint gas purchasing during October. The fears over gas shortages eased with storage facilities close to capacity after a ramp-up in imports and lower demand amid mild weather and energy-saving measures. The outlook is that winter 2022 may be difficult, but 2023 could spell disaster if current energy planning doesn’t look beyond this year.
New UK prime minister, new economic policies
After the controversial tax rate announcement last month, the UK government responded to its political crisis by scrapping the additional tax rate plans. Following the government’s announcement to withdraw the fiscal stimulus, the Bank of England (BoE) is now under less pressure to raise interest rates, as previously expected. Later in the month, Liz Truss resigned as prime minister of the UK, and Rishi Sunak was appointed as the new prime minister.
Political uncertainty seems to have been alleviated for the short term, helping to reignite demand for beaten-up UK assets like the pound. However, the new economic policy that Sunak is set to implement, will face scrutiny as the BoE delivers what could be its biggest interest rate hike in more than 30 years, and the government looks to fill the £50bn fiscal hole left by Liz Truss’ tenure.
On the data front, the unemployment rate declined to a 50-year low of 3.5% while wage growth rose, showing signs of a tightening labour market.
Positive South African MTBP
Finance Minister Enoch Godongwana delivered an optimistic medium-term budget showing fiscal restraint despite better-than-expected tax receipts. National Treasury indicated it expects to take over a portion of Eskom’s debt. Although it is necessary for the government to stabilise the financial position of Eskom, there is concern that the state-owned enterprises continue to depend heavily on the state’s resources for a financial bailout. Also important to note that the minister did recognise that significant risks still remain on the horizon, particularly surrounding global and local growth concerns.
On the data front, South African headline inflation dropped for a second consecutive month to 7.5% in September versus 7.6% in August. The major drivers were food and non-alcoholic beverages, housing and utilities, transport, and miscellaneous goods and services. However, core inflation, which excludes volatile food and energy categories, edged higher at 4.7% year-on-year, reflecting the continued rise in prices across the economy. The core inflation print is now above the midpoint of the South African Reserve Bank (SARB)’s target of 4.5%.
Global equities rebounded strongly in October to end the month positively. The MSCI World Index closed 7.18% up m/m in USD and 9.60% up m/m in ZAR. Most US stocks ended the month in the green, on the back of an incrementally more hawkish Fed and better-than-expected earnings. US economic data helped to push bond yields higher, with US 10-year government bond yields ending the month above 4%, the first month-end print above that level since early 2008 before the global financial crisis (GFC). The S&P 500 ended 8.10% up m/m. The energy sector contributed massively to the index on the back of better-than-expected earnings and buoyant energy prices. In Germany, the DAX ended the month 9.4% (EUR) higher, while France’s CAC Index closed October 8.8% in the green. The UK’s FTSE Index closed October 3.11% (£) higher.
Emerging markets had mixed returns for October, with the overall index coming under pressure for the month as Chinese markets fell. The MSCI EM index came in at -3.15% (USD) and -0.97% (ZAR) for the month. Qatar and Taiwan delivered negative returns (along with China), while Indonesia, Thailand and India outperformed the index. The markets of oil-exporting countries like Saudi Arabia, UAE and Kuwait also outperformed. Brazil, Korea, Mexico, Hungary and Poland also did relatively well, boosted by currency gains. After its inflation exceeding 83% in September, Turkey was the best performing EM country, as its central bank cut rates again.
South African market
SA equities rebounded in October to track global equities closely by posting positive returns for the month. The FTSE/JSE All Share index ended 4.89% up m/m. Property and financials contributed massively to the positive return by ending at 11% and 13.2% up respectively. The main disappointment came from Naspers and Prosus, dragged lower by their main underlying investment, Chinese tech company Tencent. South African 10-year bond yields ended the month unchanged, at already elevated levels of 11.3%, despite global yields generally pushing higher during the month. The South African rand weakened further against the US dollar; the rand has now weakened 13% against the greenback year-to-date. The finance minister delivered the medium-term budget during the month, showing fiscal restraint despite better-than-expected tax receipts. SA bonds (ALBI) returned 1.07% during the month and cash (STeFI) returned 0.51%.