VIDEO: Market Snapshot January 2022

Our Market Snapshot provides an overview of key events that influenced financial markets over the course of January 2022.

It was a difficult start to 2022 as many global markets experienced pullbacks on the back of concerns over tighter monetary policy and potentially slower growth ahead, as well as some worries surrounding expensively-priced stocks. Developed market equities and bonds recorded broadly negative returns in January, but some emerging markets bucked that trend, including South Africa. Particularly, it was the Federal Reserve’s confirmation of its shift to a more aggressive policy tightening path that weighed on investor sentiment as US inflation continued its upward trend, but growth and employment remained strong. In South Africa, decent performances from Resources and Financial stocks kept the JSE in positive territory, and even nominal bonds recorded gains despite another SARB 25bp rate hike.  

Looking at global equity market returns (all in US$), the MSCI All Country World Index returned -4.9% for the month. Emerging markets outperformed developed markets, with the MSCI Emerging Markets Index delivering -1.9% and the MSCI World Index returning -5.3%. The Bloomberg Global Aggregate Bond Index (US$) returned -2.0%, while the FTSE EPRA/NAREIT Global REIT Index (US$) produced -6.4%.

The spot price of Brent crude oil jumped another 17.3% in January, ending the month at over US$92 per barrel due to rising geopolitical tensions between Russia and NATO over Ukraine and shortfalls in production increases from OPEC suppliers. Metals prices were mixed, with aluminium up 9.6%, zinc gaining 1.2%, nickel rising 9.0% and copper down 0.7%. Precious metals were also mixed as gold lost 2.1% but platinum gained 5.1% and palladium soared 25.7%, the latter reportedly due to supply worries stemming from rising Russia-Ukraine tensions and possible sanctions against Russian exports. 

US
In the US, the Federal Reserve confirmed its more aggressive inflation-fighting stance at its January FOMC meeting, as Chairman Jerome Powell noted that it would “soon be appropriate” to raise the Federal Funds rate and signalled that its assets purchases were likely to stop in March. Market consensus sees the Fed’s first 25bp rate hike coming at the next FOMC meeting in March. This came amid another rise in consumer inflation to 7.0% y/y in December from 6.8% the previous month, driven by higher costs for energy, shelter, used vehicles and food, as well as persistent shortages of goods, a tight labour force and the ongoing fiscal stimulus.  

Meanwhile, US GDP expanded by an annualised 6.9% q/q in Q4 2021, well above market forecasts of 5.5%. For all of 2021, the economy grew 5.7%, the highest rate since 1984. There were still signs of existing constraints, however, as the ISM Manufacturing PMI fell to 57.6 in January from 58.8 in December, highlighting ongoing shortages of materials, transport difficulties and a lack of labour due to Omicron infections and resignations. 

US equities lost ground as investors gauged the impact of the Fed’s tighter stance, with the S&P 500 returning -5.2% and the Dow Jones Industrial -3.2%, while the technology-heavy Nasdaq Composite delivered -9.0% (all in US$). 

SOUTH AFRICA
In a move widely anticipated by the market, the South African Reserve Bank (SARB) again hiked its benchmark repo rate by 25bps at its January MPC meeting to 4.0%, following its November increase, in a bid to curtail inflationary pressures and expectations. Data showed CPI rose to a near five-year high of 5.9% in December, above market forecasts and well above the 4.5% midpoint of the SARB’s 3-6% target range. This also helped prompt the SARB to lift its 2022 inflation forecast to 4.9% from 4.3% previously, partly as a result of higher oil prices.  

The SARB’s most recent projections incorporate further interest rate increases totalling 200bps over the next two years: 125bps in 2022 and 75bps in 2023. The Forward Rate Agreement (FRA) market is currently pricing in a more aggressive tightening. Additionally, the central bank lowered its forecast for 2021 GDP growth to 4.8% from 5.2% previously, and its future projections call for growth of 1.7% in 2022, 1.8% in 2023 and 2.0% in 2024. Commodity prices, which provided a strong underpin to SARS revenue collections and the local equity market in 2021, are likely to be less supportive going forward, as is global growth momentum.

In January, the FTSE/JSE ALSI returned 0.9%, while the FTSE/JSE Capped SWIX ALSI, which we use as the equity benchmark for most of our client mandates, returned 2.4%. Gains were led by Resources counters, as the Resources 10 Index posted a 3.9% return, and Financials delivered 3.5%. These were offset to some extent by Listed Property (the All Property Index produced -2.9%) and Industrials with -1.9%.

South African nominal bonds managed to return 0.8% in January despite the SARB’s interest rate hike, but inflation-linked bonds (Composite ILB Index) were in the red with a -1.1% return. Cash (as measured by the STeFI Composite) produced 0.3% for the month. Finally, the rand appreciated against all three major global currencies in January, gaining 3.0% against the US dollar, 3.7% versus the pound sterling and 4.3% against the euro.

UK and EUROPE
In the UK, the Bank of England was widely expected to raise its base interest rate by another 0.25% at its meeting on 3 February, after having implemented a surprise  0.15% hike in December. Consumer inflation hit 5.4% y/y in December, its highest since March 1992 and up from 5.1% in November. Producer inflation, meanwhile, eased to a still-high 9.3% y/y in December from 9.4% the previous month. Both the IMF and OECD expect the UK economy to expand the fastest among the G7 economies in 2022, both forecasting GDP growth of 4.7% for the year after experiencing the largest drop among the G7 in 2020.

In the Eurozone, GDP rose 0.3% q/q in Q4 2021, significantly lower than the 2.3% posted in Q3, as the region battled a rise in new Covid infections, labour shortages and lockdown restrictions. For 2021 as a whole, growth registered a record 5.2%, and for 2022, the European Central Bank (ECB) is forecasting a 4.2% expansion. Among member states in Q4, Spanish GDP growth was highest at 2.0% q/q, while France and Italy also continued to recover with 0.7% and 0.6% growth, respectively. The German economy, however, contracted by 0.7% q/q. At the same time, CPI reached a fresh record high of 5.1% y/y in December, driven largely by higher energy prices.

In January, the UK’s FTSE 100 defied the equity downturn with a 0.2% total return, while Germany’s DAX delivered -3.6% and France’s CAC 40 produced -3.4% (all in US$).

CHINA and JAPAN
China reported 8.1% y/y GDP growth in 2021 in January, near expectations, with the economy slowing to 4.0% y/y growth in Q4. The latter came on the back of subdued consumer spending, Covid outbreaks and very strict government containment measures, as well as a slumping property market. However, industrial production rose by a better-than-expected 4.3% y/y in December, with auto manufacturing growing by 3.4% y/y.

To support growth, following its 10bp cut in December, the People’s Bank of China (PBoC) again reduced its benchmark one-year loan prime rate in January, to 3.7% from 3.8%, while also lowering its five-year rate by 5bps to 4.6%. Manufacturing PMI rose slightly to 50.9 in December in a sign of rising output and easing supply constraints, while retail sales surprised to the downside at 3.9% y/y, versus the 4.6% y/y forecast.

The Japanese economy is expected to record growth of only 1.8% in 2021 and then accelerate to 3.4% in 2022 as the government’s new financial aid package takes effect, before slowing to 1.1% in 2023, according to the OECD. The Bank of Japan left its key short-term interest rate unchanged in January, but adjusted upward its view of inflationary risks for the first time since 2014, raising its inflation forecasts for 2022 to 1.1%.

Japan’s Nikkei 225 lost 6.3% in January and the MSCI China lost 2.9%, but Hong Kong’s Hang Seng managed to post a 1.7% return for the month (all in US$).