Momentum Investments have released their macro research note titled, Market and economic outlook: July 2022, prepared by the Momentum Macro Research Team. Commentary by Sanisha Packirisamy, Economist at Momentum Investments and Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments.
Highlights:
Markets:
Financial market volatility will be high with uncertainties around the eventual economic growth impacts of global monetary policy tightening. Although a multitude of leading indicators are pointing to a global growth slowdown, it is unclear how severe the slowdown will be, when it will occur and how long it will last.
Fighting inflation will likely remain the primary focus of global central banks until inflation reverses downwards. During this period, the fundamental backdrops for both global equities and bonds should remain poor. However, once the inflation trend has clearly reversed, the fundamentals for bonds should improve, while equity fundamentals should stay weak until there is sufficient clarity about the extent of the ensuing growth slowdown.
After recent sharp market moves, global bonds are now better relative value versus equities and could be a hedge during potential further equity drawdowns, particularly when recession fears rather than interest rate concerns cause equity drawdowns.
Global property fundamentals remain solid, with property yields at fair value versus real bond yields.
Due to cheap absolute and relative valuations, South African (SA) equities could either hold up relatively better during global equity drawdowns or at least provide better returns during subsequent recovery phases.
Not only are SA real bond yields attractive versus global yields, but they are also higher than their historical average. Inflation-linked bonds (ILBs) should receive fundamental support from monthly inflation accruals and break-even widening in the coming months until local inflation peaks. The prospective SA real cash yield has been rising from a low level in line with SA Reserve Bank (SARB) policy rate increases.
Listed property sector fundamentals remain negative, but there has been some improvement, with property values seemingly stabilising, balance sheets improving and earnings recovering from a low base.
Economics
Unfavourable inflation surprises have roused risk aversion. A higher level of forecast uncertainty embedded in markets has commanded a higher risk premium, causing central banks to become even more data dependent.
The Russia-Ukraine war, together with aggressive lockdowns in China, have reignited supply-side concerns and further lifted already-high inflation projections.
Mounting headwinds threaten to slow the post-pandemic global economic recovery including high inflation, a rebuilding of fiscal buffers and an accelerated unwinding of accommodative monetary policies.
A more aggressive tightening of financial conditions has ignited fears of a global recession. While a policy-induced slowdown in the global economy is likely, we see the chances of stagflation as being more remote.
Akin to 2021, household spending is likely to be the primary driver of economic activity this year, while an uncertain political climate and insufficient demand remain significant barriers to investment in SA.
Surging fuel and food costs are likely to drive headline inflation to around 6.5% on average for this year, before sliding back to below 5% in 2023, with core inflation expected to remain more contained.
We expect an accelerated global hiking cycle and the fear of higher underlying inflation outcomes to motivate further local interest rate hikes to a peak of 6.25% by the end of the first quarter of next year.
ENDS
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