VIEW OF THE MONTH NEWSLETTER
JUNE 2022It was tempting to make our View of the Month picture, just a black canvas representing Stage 6 loadshedding which was introduced by Eskom during June’22. However, we felt that everyone has had a tough month, not only with loadshedding but also with massive selloffs across global equity markets, and rather opted for a feel good South African story.
Our View of the Month picture is therefore a hop-on hop-off tram that operates in the Franschhoek wine area. According to Wesgro, the tourism sector in the Western Cape, which was a top performer of the provincial economy before Covid-19 struck, is on a strong path to recovery after recording improved visitor numbers at the start of the traditionally low winter season.
According to figures released last week by Wesgro, the province’s trade and investment promotion agency, passengers through Cape Town International Airport’s domestic terminal recovered to 83% (504,000 arrivals) when compared to the same month in 2019 — before Covid-19 travel restrictions. Similarly, hotel occupancy was at 49% in May’22, representing a recovery rate of 95% when compared to May 2019.
In this month’s newsletter we cover the following topics:
1. Dealing with declining markets
2. Inflation update
3. Eskom and loadshedding update
4. Rand forecasts
5. Fuel Prices
6. Chart of the month
7. Interesting stats for the month
8. Market Stats Summary
9. Financial indicators as at 30 June 2022
10. Disclaimer
1. Dealing with declining markets
It’s been a tough first half of the year for global equity markets all round. As indicated in the graph below, the S&P declined over 20%, the worst performance since 1970. The Nasdaq (not shown in graph) was down almost 30% for the same period, the worst hit since 2002. It was not only the US that got affected and despite strong commodity prices, both developed and emerging markets sold off heavily:
A recent research report by Momentum Investments provided us with the following insights on how to deal with declining markets:
It is uncertain how much global policy tightening will be needed to quell price pressures and force inflation down closer to central bank target levels and how severe the effect of this required tightening will be on economic growth and corporate profits. Frequent lockdowns of the Chinese economy related to its zero-COVID policy could further add to global growth fears and cause instability in financial markets. Any escalation in the intensity or geographical reach of the Russia-Ukraine war will also add to market volatility and more potential downside.
Fortunately, as the US equity market already seems to discount the likelihood of an impending recession, it should be less of a surprise should it come to fruition, thus limiting the magnitude of further market declines when a recession becomes fully discounted at such time.
With global equity market declines at 20% from peaks, widely regarded as the technical definition of a bear market, one should expect the ‘bear market’ phrase to feature regularly in media headlines in coming months. Such emotive headlines unfortunately often lead to harmful investor behaviour by enticing some investors to change their portfolios at the wrong time. In this regard, Momentum found that investors on the Momentum Wealth platform destroyed 6.5% and 3.5% of their investment returns in 2020 and 2021 respectively, predominantly due to incorrect switching between funds.
It is a fundamental truism that equity markets go up over time as rising corporate profits are reflected in higher share prices. But there are interim periods when poor operating environments cause profits to fall for most companies, driving share prices and hence overall market indices lower.
An appropriate response by investors during such short-lived periods of market declines is to focus on the investment rationality of long-termism. By concentrating on the reality that equity markets historically provided strong returns over the longer term, investors will be able to push back against their inherent cognitive recency biases to overplay short-term market declines and thus refrain from making unnecessary detrimental changes to their portfolios. The fact that equity markets decline from time to time should not make investors feel obliged to react to these declines.
It is fittingly revealing that the 2008 Global Financial Crisis and the most recent 2020 COVID-19 bear markets hardly reflects on long-term annual equity graphs. Let this be a lesson to us all when dealing with the inevitability of market declines from time to time
Click here to read the full report.
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Further to our previous month’s newsletter (inflation woes), we would like to give an update to the current global inflation outlook which has improved.
Last week US core PCE inflation for May’22 came out at 4.7%, mildly below the consensus forecast of 4.8%. It was the third consecutive decline since core PCE inflation peaked at 5.3% in February’22. It was also the fourth time in the past five months that core PCE inflation has surprised on the downside.
The month-on-month increase was 0.35%. The annualised rate over the past three months is at 4.2%. If monthly core PCE inflation dropped to the 20-year median overnight and stayed there (admittedly not likely at this point), then core PCE inflation would be at 2.7% by year-end while their goal is 2%.
Core inflation also surprised on the downside in Europe. The preliminary estimate for core CPI in Europe for June came out at 3.7% vs the consensus estimates of 3.9% and the prior reading of 3.8%. It was the first decline in EU core inflation since January’22. The preliminary reading for EU headline inflation was 8.6%, above the consensus forecast of 8.1%.
Good news for headline inflation too. While US and EU core inflation is declining and surprising on the downside, there is also some good news for headline inflation. The US rig count continues to increase, along with oil production. US oil production is now at 12.1 million barrels/day, up 500,000 barrels/day from the point at which Russia invaded Ukraine. OPEC+ confirmed last week that it intends to increase production by nearly 650,000 barrels/day in August. In addition, inventories of refined product have picked up and cracking margins have rolled over.
The net result is that prices at the pump in the US have declined too. The average price for June’22 is still up 10% relative to the average price for May’22 so the decline will likely only reflect in the July CPI print, rather than the June’22 one. US natural gas prices have massively declined too. Wheat prices have declined materially too. The US wheat price is down 20% over the past two weeks. The Bloomberg aggregate grains index is down 12% over the past two weeks.
Lower core inflation, combined with lower energy and agricultural prices, has contributed to a material decline in medium-term inflation expectations.
Definitions to the above inflation update:
The “core” PCE price index is defined as personal consumption expenditures (PCE) prices excluding food and energy prices (e.g., oil and gas). Conversely, headline inflation is a measure of the total inflation within an economy, including commodities such as food and energy prices, which tend to be much more volatile and prone to inflationary spikes.
3. Eskom and loadshedding update
Eskom workers are striking to achieve well above inflation wage increases (of 10-12% with CPI inflation at 6.5% y/y) is damaging the functioning of the power grid, with load shedding expected to continue this week and next, and a wage settlement not yet reached.
The current severe degree of loadshedding is not expected to continue over Q3.22, but if it did it would collapse the South African economy into recession, after the contraction that is expected to have occurred in GDP in Q2.22.
The Eskom strike is unprotected, and as its workers are deemed essential service workers, Eskom is reported to be investigating incidents of intimidation, violence and disruptions, in conjunction with the SAPS, which could result in dismissals via disciplinary procedures.
The violence has been reported to include petrol bombing management’s personal homes and vehicles, while intimidating phone calls kept employees at home and reduced the ability for the power stations to function – reducing the amount of available electricity.
President Ramaphosa’s spokesperson, Vincent Magwenya, is reported to have said “it is tragic that union leaders are engaging in an approach that ultimately will have a devastating impact on workers. Short-term gains are not worth losing an entire job a few months later”.
“Action on intimidation is extremely important. Eskom needs the support of law-enforcement agencies. If it is allowed to continue, it will become a norm. As a result of the unlawful strike, routine maintenance work has had to be postponed. This backlog will take weeks to clear.”
We can only hope for a speedy resolution, as the current strike does not bode well for our fragile economy
The Rand weakened about 4.5% for the month. It lessened the impact of the global equity selloff on South African portfolios. Eskom’s ongoing problems, particularly the move to stage 6 of loadshedding, hit the Rand hard towards the end of the month.
Q3.22 is still at risk of marked weakness, both for the Rand and for all risk assets, with lower liquidity levels in global financial markets due to less trading activity in financial markets in the Northern Hemisphere during summer months. That is, with the bulk of global wealth held in the Northern Hemisphere, and senior traders typically winding down risky positions in Q2.22, taking vacation in Q3.22, the very thin markets typically exacerbate risky events, increasing risk-off investor behaviour.
The Rand, and risk assets in general, typically see greater weakness in the middle two quarters of the year, and greater strength in the first and last quarters of the year, with the Rand driven mostly by factors affecting global financial markets, so the April’22 weakness not unusual.
Despite very high commodity prices, South Africa is seeing a substantially weaker trade performance this year to date, with the trade surplus at R78bn almost half the size recorded a year ago for the same period, and weaker each month in 2022 so far versus 2021. Structural constraints, including electricity load shedding, dwindling transport capacity on the rail networks (theft of infrastructure, vandalism, poor management of systems, finances and procurement) and issues at the ports are some of the factors contributing to the poor performance.
South Africa’s imports exceeded the growth in exports for the first four months of this year, with imports up R111.4bn and exports only R42bn higher. Oil, petroleum products and related chemical imports accounted for a hefty R87.1bn of SA’s imports so far this year. Exports still exceed imports, yielding trade surpluses so far this year, but imports have accelerated rapidly between January’22 and April’22. If the pace continues, SA will be in a trade deficit by next year if commodity prices remain at the levels of 2022 to date (if not sooner).
Total employee tax for April’22 and May’22 is up 13% year-on-year and up 15% relative to 2019 levels. The tax data very clearly shows that aggregate formal sector incomes have been growing strongly post Covid-19. What is not clear at this point is whether there has been a significant increase in formal sector employment or whether it’s existing employed people that are simply earning more. Either case is a strong argument in favour of SA Inc.’s top-line growth. It’s early days, but so far government revenue is on track to surprise on the upside by R50bn this year.
Below is Investec’s most recent “expected case” exchange rate averages per quarter – Note the Q3.22 and onwards exchange rates were revised upwards indicating that they predict a weaker Rand:
The price of 93-octane petrol will rise by R2.37 per litre on Wednesday 6 July’22, while diesel will jump by at least R2.30 per litre.
The price increase comes as government cuts its subsidy of the general fuel levy to 75c per litre from R1.50 per litre previously. The subsidy had been introduced earlier this year to cushion consumers and businesses from the impact of spiraling oil prices caused by Russia’s invasion of Ukraine. The subsidy will be scrapped in its entirely from August, potentially pushing fuel prices even higher.
Increased oil prices have also contributed to the latest price adjustments, the department of mineral resources & energy said in a statement published on its website. However, the Rand appreciated during the period, providing some measure of relief.
As investment advisers, we don’t have a crystal ball that will allow us to always buy low and sell high. What we do have is an understanding of how market returns work and what previous cycles has taught us. The old adage, “it’s not about timing the market, but about time in the market”, has been proven true over the years.
Research shows that those who stay invested over the long run do better than those who try to profit from volatility in the market. The chart below (based on the Rolling returns of the ASISA SA General Equity sector average) shows that for an investment over 20 years, missing just the 10 best performance days, results in an outcome of 50% less when compared to being invested throughout the 20 year period.
* Credit to Kim Littler from Ninety-One for the above chart
7. Interesting stats for the month
- R5.7 billion – the amount of money the recovering wine tourism will add to the SA economy this year.
- 8 – the number of days the S&P has been down by more than 2% this year. We’ve already seen more large down days in 2022 than the whole of 2021.
- $82 billion – households withdrew $82bn in equity from their homes in Q2 2022; the most in 15 years
- 40 years – this week was the first time in 40 years that all investment categories simultaneously declined. When the stock market declines, another market would see higher demand (normally the bond market). However, on 30th June, the market witnessed a declining market amongst stocks, cryptocurrencies, bonds and the US dollar.
- 3.3% – where the market expects the Fed to get to by March 2023 (this has been scaled back from 4% a few weeks back).
- $5 – the cost per gallon for gas in the US. This is a jump of nearly $2 since Russia began building forces on the Ukrainian border
- R775,840 – with the growing focus on sustainability, this is the cost of the Tesla Model 3 rear-wheel drive. The car has a range of 305 miles and a top speed of 140mph
- 9m – the number of pages of evidence in the Zondo Commission
- $100m – the amount hackers looted from a cryptocurrency bridge, again exposing a key vulnerability in the digital-asset ecosystem
- 88,000 – Projected number of US$ millionaires that will move to a new country in 2022. Top on the list is Russia, with 15 000 high net worth individuals expecting to migrate. Where are they going? 4000 expecting to migrate to UAE, 3500 to Australia and 2800 to Singapore.
*Credit to Kim Littler from Ninety-One for the above interesting stats
The red block shows the market stats for the month of June 2022. In short, the JSE All Share Total Return index was down ↓-8% for the month (up ↑4.7% for the last 12 months). The Industrial sector was slightly up for the month (↑0.7%), this was mainly due to Naspers and Prosus. Prosus announced that they will sell part of its stake in Tencent to fund a stock buyback in itself and parent Naspers. The move is aimed at closing a gap between the market value of Prosus and Naspers and that of the 29% stake in Tencent they own. The Resource sector was the worst performing sector, down ↓-16.3% for the month. The Financial sector was down ↓-13.3% while the Listed Property sector was down ↓-10.3% for the month.
9. Financial indicators as at 30 June 2022
Global indices: (Returns are measured in Rand percentage points. For example, the S&P 500 was down -3.46% for the month as measured in Rands)
JSE Sectors:
Currencies: *NB! Positive indicates ZAR has weakened for the period, vice versa
Interest Rates:
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.