Market and economic outlook: January 2022
Momentum Investments have released their market and economic outlook for January 2022, prepared by the Momentum Macro Research Team.
Please see below, the summary of highlights from the team, as well as a downloadable PDF of the research paper.
The transition from a stimulatory to a tightening policy environment and the anticipated slowdown in profit momentum point to a lower global equity return outlook in 2022. Rand strength is likely to erode local currency returns from global assets, including equities.
The supply-demand dynamics for the United States (US) bond market is likely to deteriorate markedly this year. In conjunction with inflation that is proving to be more persistent than previously thought, these point to higher bond yields going forward. With interest rates still at historically low levels, global cash returns remain negligible. Some rand strength would further detract from rand returns.
South African (SA) equity returns in the next year are likely to be driven by rerating rather than earnings.
SA bond yields are attractive against their own history, as well as relative to those in developed and emerging markets (EMs), with part of the high real yield differential due to a fiscal risk premium. Smaller monthly inflation accruals should provide less fundamental support for inflation-linked bonds (ILBs) until the second quarter of 2022. After the recent rate hike by the SA Reserve Bank (SARB), the prospective SA real cash yield has risen to just above zero, which is more than one standard deviation below its historical average.
Decent potential local property returns need to be weighed against negative fundamental risks and uncertainties.
Cuts to projected global growth this year reflect a resurgence in COVID-19 cases and lingering supply-chain disruptions. These figures nevertheless remain above trend, arguing against fears of stagflation.
We expect increased government influence and more emphasis on redistribution and structural changes in the Chinese economy, with a lesser focus on shorter-term cyclical outcomes.
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.
Milder global growth should soften the demand for SA’s exports, while sticky unemployment will dull consumption spending. We see SA growth slowing from an estimated 4.9% in 2021 to 2% in 2022 and 1.8% in 2023.
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.
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.
Well-behaved inflation, anchored inflation expectations and a pedestrian growth outlook advocate for a moderate interest rate hiking cycle. We expect the SARB to hike interest rates by 150 basis points in the next two years.
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