Surging inflation and rising rates weigh on real returns
While asset managers entered 2022 in a strong position, global markets hit an inflection point as inflation surged from 4.7% in 2021 to 8.8% last year, according to the IMF.
“Diversification failed to reward asset managers with its usual dividend last year as equities and bonds fell materially against a backdrop of multi-decade high inflation, sharply rising rates and slowing global growth,” says Renzi Thirumalai, Investments Head at FNB Wealth and Investments.
The lingering supply chain shocks from the pandemic, coupled with exogenous shocks from Russia’s invasion of Ukraine and China’s zero-Covid policy, further compounded the situation. As a consequence, the IMF expects global inflation to ease only slightly to 6.6% in 2023.
“And the normalisation of monetary policy following a decade of quantitative easing and near-zero interest rates was always going to place strain on the financial system,” adds Thirumalai.
The fallout from this fundamental reset in monetary policy will reverberate into 2023, with significant focus placed on the health of the US economy as the Federal Reserve seems set to maintain its hawkish stance.
“The odds now seem firmly stacked in favour of a US recession, with the only question around the duration and magnitude of the drawdown, ” says Thirumalai.
“Investors will be interested in where US inflation likely settles, which will set the tone for where US interest rates eventually peak, although policymakers will remain sensitive to the impact on the
US labour market.”
From a local perspective, the South African Reserve Bank hiked interest rates by a biggerthan-expected 50 basis points to 7.75% at the March MPC meeting.
“This is its highest level in almost 14 years and is helping the local money market fast become a saver’s haven,” says Thalia Petousis, Portfolio Manager at Allan Gray.
The Bank has indicated its intention to keep raising rates to bring consumer price inflation closer to 4.5%.
“A sharp swing in the trade balance from a surplus to a deficit following a decline in exports, as platinum group metal prices weakened and load-shedding and rail failures hampered mining production volumes, adds impetus to the Bank’s need to drive foreign capital flows into the country to plug the current account deficit,” says Petousis.
In this regard, local interest rates have a significant bearing on SA’s attractiveness as an investment destination.
“Against the interest rates of Mexico and Brazil at 11.25% and 13.75% respectively, it implies that the Bank has some wood to chop to get SA in the running,” she says.
THE IMF EXPECTS GLOBAL INFLATION TO EASE ONLY SLIGHTLY TO 6.6% IN 2023