Market overview: July 2022

Global equity and bond markets rebounded in July on the back of brighter prospects for the path of interest rates, as forward-looking investors embraced the idea that the US and other major economies were slowing enough so that further interest rate hikes were likely to be less aggressive than previously expected. This enhanced corporate earnings outlooks for equity markets, while also boosting bond values. However, the inflation outlook remained a concern, especially in Europe, as energy prices remained high while other global commodity prices were mixed. A positive development was the release of Ukrainian wheat exports from Russian blockades in a bid to help ease the food crises in many countries as a result of the war, even as the fighting raged on at great human cost.

Emerging markets did not fare as well as their developed peers, weighed down by relatively less favourable inflation and growth forecasts and lingering risk aversion. The latter lent strength to the US dollar versus most other currencies for the month. Many countries continued with aggressive interest rate hikes in the wake of the US Federal Reserve’s widely expected 75bp hike, including South Africa, and the European Union implemented a 25bp rate hike as expected, its first in the current global cycle. This all came despite deteriorating economic growth outlooks for most countries: the IMF downgraded its 2022 global growth forecast further in July, to 3.2% from 3.6% in April, citing the headwinds from higher interest rates, persistent inflation, looming energy shortages in Europe and the Russia-Ukraine war.

Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 7.0% for the month. Developed markets outperformed emerging markets, with the MSCI World Index returning 7.9% and the MSCI Emerging Markets Index delivering -0.2%. The Bloomberg Global Aggregate Bond Index (US$) returned 2.1%, while the EPRA/NAREIT Global REIT Index (US$) produced a robust 8.3%. 

The spot price of Brent crude oil closed the month 4.2% lower at around US$100 per barrel, with concerns over recession gaining ground. Metals prices were mixed: nickel fell 4.5% and copper was down 5.4%, while aluminium gained 2.3%. In precious metals, the gold price lost 2.7%, palladium was up 8.4% and platinum fell 1.9% for the month. 

US

The Federal Reserve (the Fed) increased its federal funds rate by 75bps for the second month in a row to a range of 2.25%-2.50%, as expected. However, Fed Chairman Jerome Powell signalled that the next hikes may not be as aggressive, depending on the data. CPI accelerated to 9.1% y/y in June from 8.6% in May, above market consensus.

The latest data signalled a further slowing in the economy after Q2 2022 GDP surprised to the downside, contracting by 0.9% (q/q annualised) compared to the consensus of a 0.5% expansion. This reinforced expectations of recession and an easier interest rate path. Meanwhile, US GDP forecasts for the year were revised even lower: the IMF cut its outlook by 1.4 percentage points to 2.3%, the most of any other country in its July update.

US equities rallied on the improved outlook: the S&P 500 returned 9.2%, the Dow Jones Industrial Average 6.8%, and the technology-heavy Nasdaq Composite 12.4% (all in US$). US Treasury bonds also gained ground as the Bloomberg Global Agg Treasuries Index returned 1.9%, the strongest performance in two years.

South Africa

The SA Reserve Bank hiked the repo rate by 0.75% in July, more than expected, in a bid to curb inflation which hit a 13-year high of 7.4% y/y in June. The central bank also downgraded its growth forecasts, now expecting GDP growth of 2%, 1.3% and 1.5% for 2022, 2023 and 2024, respectively. 

The SARB followed other central banks which have also been hiking aggressively in order not to lag too far behind the US Fed and risk currency weakness, although SA is somewhat less vulnerable to capital outflows now than in the past due to its current account surplus. The  SARB is also signalling firm support for its 3%-6% inflation target band to dampen second-round inflation effects such as higher wage demands and future inflation expectations. The latter have been relatively subdued compared to actual inflation data, recording only a 0.9 percentage point rise in the latest Q2 2022 survey. 

July’s more positive global investor sentiment was more muted in the local market by ongoing loadshedding, which is expected to weigh significantly on economic growth. High inflation is also impacting household spending, reflected in the latest retail sales data (for May), showing a fall in growth to only 0.1% y/y from 3.4% y/y in April, far below the 1.5% y/y expected. The FNB/BER Consumer Confidence plunged to -25 points in Q2 2022 from -13 points the previous quarter, despite the lifting of all remaining Covid-19 restrictions during the period. 

The FTSE/JSE All Share Index returned 4.2% in July, underperforming many developed markets but outperforming most of its emerging market counterparts. All major sectors were in the black, led surprisingly by Listed Property (FTSE/JSE All Property Index) with a 9.1% return, Industrials (5.8%), Financials (3.9%) and Resources lagging at 0.8%. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned 2.8%. SA bonds (as measured by the FTSE/JSE All Bond Index) delivered 2.4%, SA inflation-linked bonds returned -1.3% following a strong rally in June, and cash (as measured by the STeFI Composite) delivered 0.4%. 

Finally, the rand was mixed against major currencies, losing 1.5% against the US dollar and 1.7% against the pound sterling, but gaining 0.9% against the euro. 

UK and Europe

In the UK, the BoE is widely expected to hike its benchmark interest rate by 50bps in August after a 25bp increase in June, in the face of accelerating consumer inflation that hit a 40-year high of 9.4% y/y.  This followed hawkish comments by BoE Governor Andrew Bailey in mid-July vowing that there would be “no ifs or buts” in the Bank’s commitment to returning inflation to its 2% target. The BoE also warned that the outlook for the UK economy had “deteriorated materially”, especially for 2023. As widely forecast, the European Central Bank (ECB) raised its key rate by 25bps in July, its first rate hike in the cycle as inflation soared to a record 8.6% y/y in June and is seen hitting 8.9% y/y in July. The Bank also ended its net asset purchases. Sentiment in the area remained pessimistic as fears of energy shortages and rising energy prices weighed on growth prospects in the run-up to winter as Russia further cut gas supplies to highly dependent economies like Germany via the Nord stream gas pipeline.

For the month, the UK’s FTSE 100 returned 3.9%, Germany’s DAX 2.9% and France’s CAC 40 6.3% (in US$), the latter less dependent on Russia for energy supplies due to its strong local nuclear energy network. 

China and Japan

Amid renewed strict Coronavirus lockdowns in areas like Wuhan in July, further supply disruptions and a worsening property market crisis, Chinese 2022 growth prospects were revised lower by the IMF, to 3.3% from 4.4% previously. The latest consensus private sector forecasts were also marked down, at 3.4% compared to the government’s official target of 5.5% for the year.

The People's Bank of China held interest rates steady again in July, commenting that it was “closely watching” global monetary policy tightening but signalling that there was little need for its own accommodative-but-steady monetary policy to change. The country’s Q2 GDP growth disappointed at only 0.4% y/y versus the 1.0% y/y expected, with Industrial Production in June weaker at only 3.9% and July Manufacturing PMI unexpectedly falling into contractionary territory at 49.0. Manufacturers are facing higher raw materials prices and the oil, coal and metal smelting industries contracted during the month.

In Japan, the BOJ kept its interest rate steady even as July’s core CPI was 2.2%, above its target of 2.0%. The sluggish recovery from Covid is keeping inflation more subdued than other areas of the globe and helping the central bank maintain its ongoing easy monetary policy. The Japanese government sharply lowered its GDP growth forecast for the FY2022-23 year ending March 2023 to 2.0% from 3.2% in January, primarily due to weaker exports on the back of weaker global demand stemming from China’s slower economy, the ongoing Russia-Ukraine war and the continuing impact of Covid-19. It also raised its CPI forecast to 2.6% for the fiscal year from 0.9% in January.

For the month, Japan’s Nikkei 225 returned 7.1%, the MSCI China -9.4%, and Hong Kong’s Hang Seng -7.4% (all in US$).