August also saw the IMF adjusting growth expectations lower, yet again. With the Russia-Ukraine war, higher global inflation and tighter financial conditions being their key reasons behind the revision. The revised global growth forecast went down to 3.2% for 2022, from the 3.6% forecast done in April. This, with various other factors, saw a global risk-off market for most of August. The S&P 500 dropped by 4.13%, the ACWI ended 3.68% lower and the FTSE All Share Index slumped by 6.01%, with only the MSCI EM Index ending the month up 0.42% (all in US Dollar terms).
It does seem, however, that in most market’s inflation is at a peak – apart from areas like the UK, Eurozone and Japan. Brent crude price dropped by 4.2% in July and a further 7.7% in August, which helped to ease the pressure on global CPI a little bit. In the US, the PCI figure eased to 8.5% year-on-year in July while the UK figure is showing minimal signs of “easing” as it surged passed 10% for July year-on-year.
Overall, we feel that there is still lots of uncertainty in the global economy. Especially when looking at the UK and the greater Europe. Six months down the line and the war in Ukraine has seemingly no end in sight. This coupled with the region’s ever growing energy crisis is putting immense pressure on all economies involved. Our view is that the Eurozone will probably remain under pressure for quite a while, especially now that they are heading into winter. Although the US is looking like the strongest economy at the moment, and likely to suffer the least amount of damage through this period, valuations are still very high and the US Dollar is also above its median historic value.
On the local front, the risk-off market also took its toll. The SARB hiked rates by 75bps in August after the year-on-year inflation print rose to an expected level of 7.8% in July. In equity markets, there was nowhere to hide with almost all indices ending the month in the red. The FTSE/JSE All Share Index ended the month 1.84% down with the SA Listed Property sector dropping by 5.41%. The ZAR was also on the back foot as the US Dollar continued with its position of strength with our bond market also coming under pressure.
The upside on the local risk assets, is that valuations are still very cheap. And while global and SA monetary tightening poses a headwind for SA growth, SA seems well-placed within the EM sector. This is mainly because of robust terms of trade, SA EPS growth looking much better than EM EPS momentum, steady fiscal improvement on mining revenue windfalls and spending restraint and attractive MSCI SA valuations. Even when stripping out the RESI counters, the SA equity landscape still looks very attractively priced.
Although the month of August was a tough one, there are some opportunities presenting themselves to get back into the market. Our portfolios benefited by being cautiously positioned through this period and we continue this stance, however, we are vigilant in our efforts to make use of opportunities that might arise because of low market valuations.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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