Momentum Investments today released their economic and financial market outlooks for 2022, prepared by the Momentum Macro Research Team.
Please see below for a summary of highlights from the team, as well as downloadable PDFs of the research papers.
MOMENTUM INVESTMENTS 2022 ECONOMIC OUTLOOK:
Learning to live with Covid-19
Cuts to projected growth have been made in line with a resurgence in Covid-19 cases and lingering supply-chain disruptions, which have dimmed the outlook for 2022.
The Bloomberg median consensus forecast expects growth of 3.9% in developed markets (DM) and 5% in emerging markets (EM) for 2022. These figures remain above trend, arguing against fears of stagflation.
Demographic movements in China have prompted a shift in focus towards the quality of growth and a more equitable distribution of economic gains. We expect increased government influence and more emphasis on redistribution and structural changes in the economy, with a lesser focus on shorter-term cyclical outcomes.
Pent-up demand has been a distinguishing factor driving global inflation higher this time around, unlike in the 1970s, when supply shocks sent prices soaring.
We expect a normalisation of household savings, an unwinding of supply-chain bottlenecks and a return to the labour force to alleviate global inflation pressures. Inflation expectations have remained reasonably well anchored, lowering the impact of the second-round effects of high headline inflation.
Against a backdrop of milder global growth, shaped by less accommodative fiscal and monetary policy, demand for South Africa’s (SA) exports are likely to soften. Moreover, lingering unemployment will take the shine off consumption spending in 2021. As such, we see growth slowing from an estimated 4.9% in 2021 to 2% in 2022 and 1.8% in 2023.
A more fragmented political landscape presents challenges to fast-tracking key structural reforms to resolve low trend growth in SA.
Restraining expenditures, defunct municipalities and increased allocations to financially- and operationally-ill state-owned enterprises (SoEs) remain key risks to SA’s fiscal consolidation path.
While potentially permanent increases in government spending threaten a looser fiscal policy stance relative to government’s envisioned consolidation path, monetary policy has shifted into tightening mode.
We believe that elevated fiscal risks in the medium term, concerns around trend growth and an unwinding in SA’s terms of trade will continue to drive a weakening bias in the currency in the medium term. Nevertheless, the level of passthrough into inflation remains low.
A tempered rise in rental inflation and reduced increases in medical aid tariffs are likely to drive an atypical response in local inflation. We expect headline inflation to average 4.5% in 2021, 4.6% in 2022 and 4.3% in 2023.
In our view, well-behaved inflation, anchored inflation expectations and a pedestrian growth outlook advocate for a more moderate interest rate hiking cycle. We expect the SARB to hike interest rates by 150 basis points on a staggered basis in the next two years.
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2022 FINANCIAL MARKET OUTLOOK:
Policy progression pertinent
As more and more countries move away from a zero-tolerance stance towards COVID-19, the negative growth impact of each new COVID mutation wave is likely to become less severe going forward, unless vaccines become less effective against new virus variants or new mutations more fatal.
Financial asset prices have been hugely supported by abundant policy stimulus in 2020/21. The transition in the policy environment in 2022 from less stimulus to eventual policy tightening, should culminate in a less conducive backdrop for asset class returns and could lead to periodic drawdowns in riskier asset classes.
While the anticipated slowdown in profit momentum associated with lower global growth also points to a lower global equity return outlook in 2022, the magnitude and longevity of any potential equity sell-offs will be limited as long as the global economic recovery remains intact. What would be problematic for equities is a spike in bond yields, if the bond market perceives the US Federal Reserve (Fed) to be behind the curve on fighting inflation.
The expected turnaround in the quantitative easing (QE) cycle going forward should be a negative fundamental demand factor for global bonds. In conjunction with inflation that is proving to be more persistent than previously thought, this points to higher bond yields going forward.
Although global equities look cheaper than cash or bonds in relative valuation terms, widespread expensive absolute valuations across asset classes put a major constraint on the future returns that can be expected from each of global equities, bonds and cash in 2022. Furthermore, should the rand appreciate from current undervalued levels as we anticipate, this would erode the local currency returns from global assets for South African (SA) investors.
If US real bond yields rise in anticipation of tighter monetary policy as we expect, this should benefit the rest of the world’s (RoW) equity markets over the US with its long-duration growth characteristics and high valuation premium.
Pressure on SA equity market profits in 2022 is expected from a slowing in global and SA economic momentum on top of the high profit base created in 2021. As such, returns will have to come from a rerating in market valuations. Fortunately, the SA equity market valuation picture looks quite favourable.
Not only are SA real bond yields currently attractive versus developed market (DM) and emerging market (EM) yields, but SA’s real yield premium is also high against historical averages. Relative to SA equities and cash, nominal bonds have consistently been the cheapest asset class since 2013. In the inflation-linked bond (ILB) space, there should be some scope for further break-even widening in the interim, with inflation expected to peak in the first quarter of 2022. After the recent rate hike by the SA Reserve Bank (SARB), the prospective SA real cash yield has risen to above zero.
We think a large part of the negative fundamental backdrop for SA listed property has already been discounted.
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Financial Market Outlooks