The month of September lived up to its historical standing of being the worst month of the year, as it was marked with aggressive interest rate hikes from most central banks around the world. Unfortunately, inflation numbers remained stubbornly high and continued to beat expectations globally. The effect was negative on global market sentiment, as markets started to price in a more depressed growth outlook. A global equity sell-off followed, as the MSCI World Index lost 9.5%, compared to 11.9% for the MSCI Emerging Markets Index.
The below table represents returns on the S&P 500 since 1945. In finer detail it will be seen that in September the average return is -0.56%, much lower than any other month.
Locally, the South African JSE All Share has outperformed its global peers, in the month of September and since the start of the year - in Sep (-3.8% vs -9.3% for the MSCI World) and year-to-date (-7.0% vs -25.1%). On a relative note, this can be seen on the bright side, and thankfully so to the resource rich JSE which was the only sub-sector which produced a positive return (JSE Resource 10 returning 2%), which helped the local bourse limit losses. Special mention to the gold and platinum miners that helped the sector most, as a weaker Rand and news that the London Metal Exchange was considering a ban on the trading of Russian metals boosted prices. Coal exporter, Thungela, was a standout performer for the sector as it moved 20% higher during the month. While Sasol was the biggest detractor as it suffered under a lower price for oil as recession fears and a slowing Chinese economy move the price for brent crude 9% lower.
Globally, over the first three quarters of 2022, the S&P 500 has cemented its 3rd worst performance since the 1950s. While the US dollar (US Dollar Index - DXY) is having its best year on record since 1967. The current market environment is truly unprecedented, as we face the one of the fastest rate hiking cycles in history, persistent inflation and geopolitical tensions. The S&P 500 lost 9.2%, while the technology heavy Nasdaq declined by -10.6% in September – its worst September performance since 2008.
Economic Overview
Local
Inflation & Interest Rate
South Africa’s year-on-year inflation declined slightly from 7.8% in July to 7.6% in August. The South African Reserve Bank (SARB) raised its benchmark repo rate by another 75 bps to 6.25%. The rate is now similar to rates last seen in early 2020.
Trade Balance
In August South Africa posted the smallest trade surplus in seven months of R7.2bn, down from a revised surplus of R24.8bn in July. Exports dropped 1.0% month on month to 175.37 billion rand, while imports were up 10.4% at 168.19 billion rand, the South African Revenue Service said. The cumulative trade balance surplus for 2022 is R163.36 billion.
A report from First National Bank (FNB) noted that China continues to be the top import and export partner of South Africa, Chinese imports now make up 21.6% of total South African imports. The US was the country’s second-largest import partner at 7.2% of the share and Germany the third 6.9% share.
Load-shedding
So far in 2022 South Africa has had 1949 hours (c. 81 days) of national loadshedding - double the hours experienced in 2021
The constant waves of load shedding continue to put a strain on the economy, with mining production shrinking for the sixth consecutive month by 8.4% (year-on-year) in July. The manufacturing sector broke its three-month contractionary trend after manufacturing production rose by 3.7% from a year earlier in July. While encouraging, the advance is likely due to the low base effects caused by the social unrest in July 2021.
Global
US Inflation & Interest Rate
US inflation remains stubbornly high after annual CPI data showed a jump to 8.3% in August as compared with forecasts for a drop to 8.1%. However, the primary concern is the fact that core CPI, which excludes the effects of volatile items like food and energy, rose by 0.6% month-on-month in August, as compared to 0.3% in July. This highlights the fact that inflation has seeped into the stickier parts of the economy and may be harder to bring down than expected.
Unsurprisingly, the high inflation reading, and strong PMI data pushed the Federal Reserve to raise interest rates by 75 basis points at their September meeting. However, of more importance was that it came across with a strong message that a Fed pivot is not coming any time soon and that rates will remain higher for longer.
US Labour Market
US employers hired more workers than expected in September, while the unemployment rate dropped to 3.5%. The tight labour market puts further pressure on the Federal Reserve to continue its aggressive monetary policy tightening campaign.
China Zero-Covid Stance
China as its zero-Covid policy continues to disrupt economic activity. According to a statement made by the World Bank, this, coupled with the housing market crisis has put China’s economic growth behind the rest of Asia for the first time in over 30 years. It is now forecasting GDP growth of only 2.8% for China in 2022, as compared to the 5.3% expected for the rest of the region.
UK Politics
Liz Truss became U.K. prime minister and was immediately confronted with the enormous task of increasing pressure to curb soaring prices, ease labour unrest and fix a health care system burdened by long waiting lists and staff shortages.
Queen Elizabeth II, Britain’s longest-serving monarch, whose broadly popular seven-decade reign died on Thursday at Balmoral Castle in Scotland. She was 96. Her death elevated her eldest son, Charles, to the throne as King Charles III.
Inflation & Interest Rate Summary
How did the Optimum funds perform?
The Optimum funds detracted from client portfolios across the board in a month where all asset classes sold-off. The funds performed slightly behind benchmarks in September but are generally ahead since the start of the year and over longer time periods.
The overweight to financial and health care stocks detracted from portfolios, while the underweight to US equities helped portfolios limit losses. Portfolios with less equities performed better than those with more equities. Unfortunately, equities are typically the major source of returns, and in this deep global equity sell-off environment it is tough to hide.
Optimum Investment Group (Pty) Ltd
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DISCLAIMER
While every care and effort has been taken to ensure the accuracy of the information provided, any information shared in this document does not constitute advice as defined in the Financial Advisory and Intermediary Services Act, 2002. It is your responsibility to get professional advice to accompany you with the information read, that will suit your personal circumstances.