Global equity markets have been rewarding in 2021, recovering from the shock of the pandemic supported by huge stimulus packages, loose monetary policy, the “reopening trade” and strong consumer demand.
As 2021 is now behind us, the key global themes the world now faces is the prospect of rising prices (persistent inflation), swifter-than-expected interest rate hikes from central banks and the threat from the Omicron variant as well as a slowing China.
The world is likely to continue in a more inflationary environment, driven by rising wages, deglobalisation and decarbonisation but we do see a return to a more normal, pre pandemic environment by the end of 2022. In the U.S., the Federal Open Market Committee (FOMC) has started to lay out the path for the reduction in accommodative monetary policies and intensified its battle against inflation by moving to end their asset-buying program earlier, signalling that they favour raising interest rates three times in 2022 - a faster pace than expected. Treasury yields are also expected to rise in 2022 with 10-year yields expected to trade at the 2% mark by mid-2022 on the back of tightening monetary policy by the Fed.
The European Central Bank kept its main policy rate unchanged at its most recent meeting. It also indicated it would end its emergency asset purchase program by March but would temporarily increase its Asset Purchase Program to smooth the transition. The ECB signalled that any exit from ultra-easy monetary policy would be slow, as the pandemic was again depressing business and consumer sentiment and threatening the economic recovery.
Although monetary policy has begun to tighten across the globe, we expect a slow withdrawal from pandemic-era policies which should provide continued support for risk assets, and while inflation pressures are still a risk to the trajectory of interest rate hikes we expect these risks to ease by the second half of 2022. This backdrop still supportive for “risk-on” assets but from a valuation standpoint, both developed market equities and fixed income securities present some challenges and whilst we expect equity returns may be more muted, we are still of the view that equities will provide be positive gains in 2022 in both developed and emerging markets, primarily supported by strong corporate earnings.
Despite the recent setback, commodities are also set for a strong year ahead. While energy stands out as the major outperformer, tight balances across industrial metals and agriculture have also propelled those sectors higher, as supply bottlenecks continue to keep pace with resurgent demand.
For emerging markets, all eyes remain on China in 2022 as investors wonder whether a far-reaching government clampdown on internet companies and other sectors will continue. Beijing’s measures came as part of a wider effort to make education more affordable as part of President Xi Jinping’s drive for “common prosperity”. 2022 is still expected to be an uphill struggle for EM asset returns as global growth moderates and the Fed starts hiking.
The outlook for South Africa in 2022 is challenging with lower growth and higher inflation poised to impact an already fragile recovery. The South Africa Reserve Bank (SARB) recently hiked the repo rate by 25 basis points to 3.75%, placing the prime lending rate at 7.25%, the first repo rate hike in nearly three years. The Reserve Bank is expected to hike rates further in 2022 to fend off the global interest rate hiking cycle and a weaker rand. The risk of new virus variants and the instability of electricity supply all continue to present headwinds for the local economy. In addition, South Africa has one of the world’s highest unemployment rates with the most recent report pointing to a new record high at a 34.9% unemployment rate, adding to an already politically volatile environment. Growth is projected to rebound to 5.2% in 2021 before slowing to 1.9% in 2022 and 1.6% in 2023.
On a positive note, South Africa’s finances have stabilised of late with improved tax collections and SA continuing to benefit from stronger terms of trade. Local bonds screen attractively on a real yield basis, which is attracting some foreign interest. SA equities have ended the year strongly with the FTSE/JSE Africa All Share Index posting multiple record highs as it climbed almost 22% this year supported by a weaker rand, attractive valuations and supportive monetary policy. Even after this year’s gains, valuations on the FTSE/JSE Africa All Share Index remain well below those of emerging-market peers.
We look forward to engaging with you in 2022 and take this opportunity to share our “Key Investment Themes for 2022”.