VIEW OF THE MONTH NEWSLETTERMAY 2022
Our View of the Month is a picture of Eskom’s Kusile Power Station in Mpumalanga. Unit 4 of the power station project was handed over this week to the group’s generation division to formally form part of its commercial fleet.
Yes, it is eight years late and over budget but let’s focus on the positives. The unit is expected to add 800 megawatts (MW) to the grid, hopefully aiding the fight against load shedding.
Work on two other units of the power station is still ongoing. On completion, the power station will consist of six units that are expected to produce a maximum 4,800 MW.
Insufficient electricity supply, clouds sentiment. Security of electricity supply is needed to increase business and consumer confidence in order to place the country on a sustainable growth path.
In this month’s newsletter we cover the following topics:
1. The Markets
2. Inflation woes
3. Capital protected investment opportunities
4. The benefit that continues to educate
5. Rand forecasts
6. Fuel Prices
7. Chart of the month
8. Interesting stats for the month
9. Market Stats
10. Financial indicators as at 31 May 2022
May ’22 was a rollercoaster month for the markets. Below short summaries of the highlights per market.
South African Market
Due to a notable decline in exports, South Africa recorded a trade surplus of only R15.49 billion in April ’22, down from a revised surplus of R47.2 billion in March ’22. Our unemployment rate fell to 34.5% in Q1 2022 from 35.3% in Q4 2021. Other data showed that private sector credit in South Africa rose by 5.99% year-on-year in April after rising by 5.92% in March. The FTSE/JSE All-Share Index ended up 0.2% for the month.
May was a rocky month for the US market after it briefly dipped into bear market territory (defined at 20% off a previous peak) in the middle of the month. Concerns with regards to inflation, monetary tightening and rising rates remain. The Dow and S&P 500 finished the month flat, thanks to a major rally during the week prior to month-end. The Nasdaq lost about 2.1% in the month.
The Eurozone inflation reading hit a record high for a seventh straight month, surging to 8.1% in May. The European Central Bank signaled possible rates hike in July to combat inflation. The pan-Europoean Stoxx 600 index closed down 0.85% for the month.
As per our market summaries’ section, inflation is a concern for developed markets as it affects their return negatively. We dedicate this section to explain inflation and what history has told us will happen post a peak in inflation.
What is inflation? Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. The Consumer Price index (CPI) is one of the most popular measures of inflation and deflation. If the CPI rate is being reported at 5.9% year-on-year, it means that prices, in general, are 5.9% higher than they were during the same period in the previous year.
What is the current inflation rate? South Africa’s current official CPI rate is 5.9%, the highest it’s been in the last 5 years. n contrast, the US CPI rate is currently at a 40 year high of 8.3%. This is causing major complications for markets and as the saying goes “when the US sneezes, the world catches a cold”.
Types of inflation? A quick trip down memory lane to our economy textbooks highlights two main types of inflation:
- Demand-pull inflation occurs when there are not enough products or services being produced to keep up with demand, causing their prices to increase.
- Cost-push inflation, on the other hand, occurs when the cost of producing products and services rises, forcing businesses to raise their prices.
What is causing the current high inflation? In South Africa the higher inflation is largely driven by cost pushes. Energy is a component in most goods and services, and when, as is the current situation, its price rises, producers will need to pass on the cost. Internationally, the demand-driven inflation was starting to fade post the Covid pandemic, until the war in Ukraine wreaked economic havoc in the form of supply chain disruptions. Excess demand and cost-push forces operate simultaneously and interdependently in an inflationary process.
What’s the link between inflation and interest rates? Central Banks (like the SARB and the US FED) manipulate interest rates as a way of controlling inflation. Higher interest rates lead to higher borrowing costs and in turn less spending. This can dampen inflation. The opposite is also true, if inflation is low and an economy growing too slowly, central banks may cut interest rates to stimulate more borrowing and more spending
Why do stock markets react negatively towards high inflation? The stock market, of course, anticipates that there is a certain amount of inflation each year and adjusts what the expected returns should be against the expected inflation. However, sudden increases in inflation are detrimental, as it takes companies several quarters to pass along higher input costs to consumers resulting in lower earnings.
Has inflation peaked? It depends on where you live. According to UBS Chief Economist Paul Donovan at the World Economic Forum (WEF) in Davos, in the US inflation has potentially peaked in March’22 for the following reasons:
- Decline in inflation: Year-on-year inflation in the US declined slightly in April’22, with the 12-month figure falling slightly to 8.3% from 8.5% in March’22. It’s important to remember that this decline does not mean that inflation is definitely declining – it merely suggests that inflation gains have plateaued for the moment. It requires more than one month of moderation in inflation data to confirm that inflation has peaked.
- Fading demand: Many of the areas where, during last year, prices were being pushed up by extraordinary demand, are now seeing the inflation rate come down. For example, apparel prices.
- Base effect: The most common way inflation is quoted is the year-over-year change in price. That means the year-over-year inflation rate that we always quote is telling us not just about prices today, but also our prices a year ago. Of course, if you’re comparing a normal economy to a lockdown economy, there’s going to be a change in prices.
- Wage cost to price spiral: Economists do not see wage costs (as opposed to wages per se) rising in an inflationary manner at the moment. Wages are about 70% of inflation in a developed economy. The distinction between wage costs and wages is an important one. If people are paid more money because they’re working harder, that’s not inflationary. In most economies, people are working harder. Generally, in developed economies, economic output and GDP are above pre-pandemic levels, but employment is below pre-pandemic levels. That means there are fewer people producing more.
How do markets react post a peak in inflation? Inflation is a leading indicator of an approaching recession, but equity markets react in advance, suggesting that if we are close to a peak, we may be through the worst of the recent market woes. In the below research from Investec Securities, they indicate the median returns for the S&P500 post an inflation peak are as follows:
|Months post inflation peak
|S&P500 median return *
* Past performance is no guarantee of future performance
Many investors cannot tolerate the volatility associated with equity markets but require the growth equity markets offer. Capital protected investments provide these investors with exposure to equity markets while protecting (fully or partially) their initial capital.
Capital protected investment opportunities currently on offer are summarised in the table below:
|* Investment name
|Term and potential return
|Euro Stoxx 50 Digital Plus
|First 40% decline protected
|JSE Stockbroking account
|3.6Y investment term with a minimum return of 55% in ZAR if the index ends flat or positive
|East Asian Growth Basket Limited
|USD or AUD
|S&P 500 (45%)
Euro Stoxx 50 (20%)
Nikkei 225 (20%)
Global emerging markets ETF (15%)
|5Y investment term. Return capped at a basket growth of 40%.
|Momentum Enhanced Growth Option
|Diversified global index
|15% secured return
15% participation threshold
350% participation rate
|End of June
* Click on the investment name to view the detailed brochure
Vista Wealth clients made substantial investments in the Investec Euro Stoxx Select Dividend 30 Autocall during April’22. Investec is giving participants that missed out on this opportunity another bite at the cherry, well sort of. In the table below we list the differences between the two instruments:
|Euro Stoxx Select Dividend 30 Autocall
|Euro Stoxx 50 Digital Plus
|Open for business
|No, closed in April’22
|Yes, closes 10 June’22
|Euro Stoxx Select Dividend 30
|Euro Stoxx 50
|Maximum 5 Years
|Autocall – compares annually if index flat or positive. If true, payoff
|Digital – compares at end of term if index flat or positive. If true, payoff
|Payoff if index flat or positive
|17.5% per annum
|55% minimum PLUS unlimited uncapped upside above 55%
|First 30% decline protected
|First 40% decline protected
|ZAR or USD
A major lesson we have learnt during the Covid pandemic, is that life in unpredictable, and change is inevitable. Economic circumstances can change in the blink of an eye. Routines are anything but. Our loved ones can be taken from us in an instant.
That’s why the most important lesson we can teach our children, is to be prepared. As parents, how do we ensure that our children are fully equipped to survive, and even thrive, in these stressful times, especially if we can’t always be there to protect them? the answer is, by giving them something solid they can count on, i.e. a good education.
We have various service offerings which will assist in securing your children’s education should you become disabled, critically ill, or pass away. Therefore, giving them the best chance of creating a brighter future.
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The Rand is suffering from a confluence of negative global forces and could see further weakness if these worsen. Domestically the increased loadshedding, increased Covid infections and funding of the devastating KZN floods is not helping growth either.
As indicated in the inflation section of our newsletter, global inflation is likely to ease over the second quarter of 2022 (Q2.22). For the rand, which is largely driven by international factors, the outcome of substantially weaker US indicators on economic activity could, along with moderations in US inflation aid some strength, although this could take a few months to realise.
Lastly, the sell in May and go away phenomenon, or start of the Northern Hemisphere summer, typically has a negative effect on emerging market currencies and other risk assets.
Below is Investec’s most recent “expected case” exchange rate averages per quarter – they note the Q2.22 forecast could be weaker than indicated below but will only advise during May’22:
Earlier this year, the SA government announced a temporary reduction in the general fuel levy of R1.50 per litre between April and May 2022 to provide limited short term relief to households from rising fuel prices following Russia’s attach on Ukraine.
On Tuesday 31 May’22, they extended its general fuel price levy intervention until the beginning of August. The extension will take the form of a continuation of the relief of R1.50 per litre for the first month, from 1 June 2022 to 6 July 2022. It will be followed by a downward adjustment of the relief for the second month to 75 cents per litre from 7 July 2022 to 2 August 2022.
Treasury said that the revenue foregone from the extension of the relief is estimated at R4.5 billion
Below what you can expect to pay at the pumps during the month of June’22:
The chart below shows the price-to-earnings (P/E) ratio for the MSCI World, MSCI World Growth and MSCI World Information Technology indices. The P/E ratio measures the relationship between a company’s stock price and its earnings per share (EPS), giving investors a sense of the valuation of the company.
Companies with high P/E ratios are often growth stocks and can, at times, be overvalued compared to their current fundamentals. Similarly, companies with low P/E ratios are referred to as value stocks and are sometimes considered as undervalued.
Markets are battling with surging inflation and rising interest rates, which is proving to be more challenging for growth stocks, with the US tech-heavy Nasdaq index recording its worst monthly return since 2008. The valuations of the broad global equity index as well as the technology and growth indices have now declined back to pre-pandemic levels.
Investors in growth stocks have been spooked by central banks’ more aggressive monetary and fiscal tightening paths. Growth stocks are more sensitive to interest rate rises as investors expect higher earnings in the distant future, and the higher interest rate used to discount their future earnings increases, meaning the present value of those earnings (in theory, the share price) decreases.
* Credit to Momentum Global Investment Management for the interesting commentary and chart above
- 130 – cafes closing, as Starbucks exits Russia after 15 years joining McDonald’s 850 outlets shut
- 47.6% – less vehicles sold in China from previous year
- 65% – iPhones share of smartphone sales in the US
- 36% – car sales have declined in China in April from a year earlier
- 40 – the level UK consumer confidence has plummeted to – its lowest level since 1974
- 14 times – in the last 95 years, the S&P 500, has completed the requisite 20% plunge that defines a bear market
- 50 – the widest gap between inflation and Fed funds rate in 50 years
- 15 million – amount of people that have died because of the Covid pandemic – equal to the population of Manila, or Rio de Janeiro, or the entirety of Zimbabwe. That’s one out of every 500 people on Earth
*Credit to Kim Littler from Ninety-One for the above interesting stats
The red block shows the market stats for the month of May 2022. In short, the JSE All Share Total Return Index was slightly down ↓-0.4% for the month (up ↑11% for the last 12 months). The Financial sector was the only sector positive for the month (up↑3.3%), this after it was the worst performing sector for the previous month. The Listed Property sector was flat for the month. The Resource sector was down (↓-0.6%) while the industrial sector was the worst performing sector down ↓-2.2% for the month.
Global indices: NB! Returns are measured in Rand percentage points. For example, the S&P 500 was down -1.01% for the month as measured in Rands
Currencies: *NB! Positive indicates ZAR has weakened for the period, vice versa
The information contained in this e-mail is of a general nature and is not a substitute for professional advice. We recommended that you obtain specific professional advice before you take any action. Vista Wealth Management takes all reasonable steps to ensure that the content of this e-mail is accurate and up to date, however, errors and omissions may occur. The accuracy of the information contained should therefore not be relied upon as a statement of fact.