Momentum Investments has released their market and economic outlook for April 2022, prepared by the Momentum Macro Research Team.
Our basic premise is that as long as Russia-Ukraine remains a regional conflict that does not escalate into a broader global destabilising event, it should fade as a meaningful driving force for financial markets beyond the short term.
In our view, the more primary fundamental driver for financial markets this year is the global policy pivot from stimulus to tightening that should culminate in a less conducive backdrop for asset class returns and could lead to periodic drawdowns in riskier asset classes this year.
History shows that South African (SA) equities could typically stutter a bit around the first United States (US) Federal Reserve (Fed) interest rate hike, but that one-year returns after the first hike are normally strong. Valuations remain cheap against historical averages.
The high real yields available from SA nominal bonds remain a key underpin for the asset class. Monthly inflation accruals should be supportive for inflation-linked bonds (ILBs) in the first half of 2022 until local inflation peaks. Although the prospective SA real cash yield has been rising from a low level in line with recent policy rate hikes, it is still around 0.8 standard deviations below the historical average.
Negative SA listed property sector fundamentals are leading to lower rental growth expectations.
In this new phase of the pandemic, global central banks and fiscal authorities are switching gears from rescuing the economy at any cost to normalising policy as they attempt to stem the rise in inflation expectations.
Inflation is running hot on persistent critical supply shortages and geopolitical pressures underpinning a surge in international oil prices. Higher energy inflation could squeeze real incomes further, with the Eurozone and United Kingdom (UK) experiencing a harder hit than the US as they rely on Russian oil and gas supply.
Stubbornly high price increases have further accelerated the pivot towards a quicker and sharper unwinding of ultra-accommodative monetary policy conditions. However, nuanced labour market dynamics and underlying inflation point to a divergence in monetary policy responses globally.
SA experienced a notable rebound in economic activity from previous stimulus measures, but it is going to be much harder to sustain growth from here given reduced global demand, structural unemployment and energy shortages.
A faster-than-anticipated recovery from the pandemic and a positive surprise on SA’s near-term fiscal and debt metrics should stave off any negative ratings action this year.
Rising global inflation, increasingly hawkish rhetoric from global central banks and upside risks to local food and fuel costs should deliver a front-loading of the interest rate hiking cycle to curb second-round inflation pressures.