March 2022 economic review

Introduction

Global markets finally managed to find some relief in March. On a country level, major US indices recorded good gains for the month, while European and Chinese equity markets struggled. South African equity markets once again managed to advance slightly. Despite global equity markets rallying in the final week of March on the back of progress in peace talks between Russia and Ukraine, the optimism quickly faded after the Ukraine president stated he did not expect a quick resolution to the conflict. The ongoing war in Ukraine has further impacted global supply chains, record inflation levels and the prospect of tightening monetary policy.

Inflation and the impact on global central banks

The narrative that inflation was transitory began to change at the start of the year and over the quarter central banks became gradually more hawkish. The Russian invasion of Ukraine and the resulting commodity supply shock poses a dilemma for central banks who need to choose between attempting to tame inflation or support growth. According to JP Morgan, “central banks have so far suggested that they view inflation as the more pressing problem to tackle unless the growth outlook markedly deteriorates.”

The European Central Bank (ECB) confirmed the tapering of the pandemic emergency purchase programme (PEPP) will conclude in June and the asset purchase programme (APP) will gradually end in the third quarter of 2022. President Christine Lagarde stated a first rate hike this year could arrive “some time” after the end of the ECB’s asset purchases.

The US Federal Reserve (Fed) announced it would raise interest rates by 25 basis points (bps) as expected and made it crystal clear further increases would be appropriate. The Fed’s aim is to stop the US economy from “overheating” and reducing inflation. The median voting member now expects seven rate hikes this year.

The Bank of England (BOE) increased interest rates by 25 bps during its monthly meeting, its second hike for the year. The BOE mentioned the geopolitical risks have increased expectations for weak growth and higher inflation this year.

Some emerging market central banks (Brazil, Taiwan, Korea, Hong Kong) followed the trends of policy normalisation, all announcing rate hikes. In contrast to global peers, the Bank of Japan (BOJ) kept rates unchanged, announcing their concerns on the impact of the Russia-Ukraine situation was around growth not inflation.

US

US consumer inflation continued to soar, coming in at 7.9% year-on-year (y/y) in February, its highest reading since January 1982. Core CPI, excluding food and energy prices, came in at 6.4% y/y in January, its sharpest rise since August 1982. Rising inflation has hurt the purchasing power of US consumers, and as a result retail sales edged up only 0.3% month-on-month (m/m) in February, easing from an upwardly revised 4.9% increase in January.

On a positive note, both the IHS Markit US Manufacturing and the Services Purchasing Managers’ Index (PMI) in March increased for the second consecutive month, as demand conditions and supply issues continued to improve from January’s omicron impact.

COVID-19 outbreak in Shanghai weighs on China’s economic outlook

The escalating COVID-19 outbreak in Shanghai resulted in heavy lockdowns and saw strict preventative measures being implemented. Since Shanghai is considered the financial hub of China, this has added to the economic woes of the world’s second-largest economy. Furthermore, investors were concerned over the prospect of China’s possible support for Russia’s invasion of Ukraine, which could lead to sanctions.

In terms of economic data, China’s official manufacturing PMI fell to 49.5 in March from 50.2 in the prior month. This was the first contraction in factory activity since last October, further reflecting the impact of the widespread COVID-19 outbreaks in key cities, including Shanghai and Shenzen.

SA inflation holds, while economic data paints mixed picture

In local economic data, February annual headline inflation measured by the consumer price index (CPI) came in at 5.7% y/y, unchanged from January’s print. According to Stats SA, the key drivers were once again food and transportation costs. Such reading is still at the upper end of the 4-6% target band, thus it was no surprise when the SARB raised the repo rate by 25 bps during the monthly meeting. The SARB governor also stated that inflation is expected to rise above the upper end of the target band in the coming months, which added to expectations of more rate hikes in the future.

Retail sales rose for the fifth consecutive month, advancing 7.7% in January compared to an upwardly revised 3.2% gain y/y in December. This was also the fastest increase in retail activity since June. Manufacturing production also jumped 2.9% y/y in January, almost in line with market forecasts of a 2.85% rise and was the strongest increase in factory activity since June.

The delayed Quarterly Labour Force Survey (QLFS) was released by Stats SA in the last week of March and showed that total employment partially recovered in the last quarter of 2021, with the number of employed people increasing by 262 000 from the previous quarter. However, due to a larger increase in the labour force, the unemployment rate rose to a new record high of 35.3% in the fourth quarter from 34.9% in the third quarter. The youth unemployment rate remained unchanged at 66.50% in the fourth quarter.

UK economy expands

The UK’s economy expanded by 0.8% m/m in January, marking the strongest growth in seven months. UK inflation was 6.2% y/y in February, the fifth consecutive rise. The economy’s recovery is partly due to the omicron variant fading and restrictions being lifted. Despite the UK being less dependent on Russian energy imports, their heavy usage of gas and oil exposes the country to persistently higher energy prices and thus higher inflation levels.

Russian sanctions intensify

Russia officially moved past Iran and North Korea to become the world’s most sanctioned nation after just 10 days following the invasion. Samsung suspended product shipments of phones and chips to Russia due to the geopolitical developments, joining a growing list of companies from Apple to Microsoft. The UK and US imposed a ban on the import of Russian oil. Finally, Goldman Sachs announced its plans to close its operations in Russia, the first major Wall Street bank to do so.

In response to the sanctions suffered, Russia announced an export ban of 200 products. The government stated the measure was “necessary to maintain stability on the Russian market”.

Global markets

Despite the ongoing conflict in Ukraine, developed equity markets ended the month higher as the MSCI World Index returned 2.52% m/m in USD and -3.05% in ZAR. US stocks proved resilient through the recent market volatility as the S&P 500 (US$) posted positive m/m gains (3.71%). However, following seven straight quarters of gains they ended the first quarter of 2022 down. European equities fared worst amongst developed market peers, as their reliance on Russian energy exports exposes them most directly to the fallout from the conflict. The Euro Stoxx 50 (€) returned -0.42% m/m.

Emerging equity markets experienced another tough month, under pressure from Russia and China’s performance. The MSCI Emerging Market Index closed -2.52% m/m in USD and -7.82% in ZAR. The MSCI Russia Index was marked down to zero and trading stocks were suspended. Sentiment turned considerably negative on Chinese companies in March, due to the uncertainty of whether the Chinese government would support Russia’s invasion. The prospects of sanctions being extended to China left foreign investors in Chinese companies scrambling to avoid a similar outcome experienced by Russia’s foreign investors.

Local markets

The South African equity market advanced for the sixth consecutive month, as the FTSE/JSE All Share Index closed at 0.01% m/m. The local bourse, along with Brazil and India, were the only major global markets to deliver a positive return for the quarter. JSE-listed shares exposed to the domestic economy were the key drivers of March’s performance, particularly financial companies and clothing retailers.

Financials led the pack and was the only major sector to post gains, returning 0.21% m/m. Resources finished the month in the “red” for the first time this year, -2.03% m/m. Industrials lagged once again, closing the month 4.87% down, noticeably Naspers (around -14% m/m) and Prosus (around -15% m/m) weighing on the sector. Bonds gained slightly, the All Bond Index (ALBI) returning 0.45% m/m. SA listed property experienced strong gains, 5.05% m/m. Cash (STeFI) delivered a moderate return of 0.36% m/m. South African value managers (1.44% m/m) outperformed growth managers (-1.66% m/m). Value managers have also been leading the way globally, but to a lesser magnitude.

The ZAR continues to benefit from the surge in commodity prices and the recent hawkish tone by the SARB, which in turn makes South African assets more attractive globally. The ZAR gained as much as 7.76%, 6.75%, 5.75% and 5.38% against the sterling, euro, USD, and Japanese yen.