Mid-March market report

The rand has shown resilience despite the general selloff in risky assets.

2022 continues to be an uphill battle for global stock markets as one hurdle after another appears. Covid-19 disruptions, expectations of a hiking cycle by global central banks, and now the ongoing Russia-Ukraine conflict continue to push investors away from risk assets towards safe havens.

As such the MSCI All Country World Index, which lost 2.70% in February, has lost a further 3.65% in March thus far. The poor performance is being felt across the board as both the MSCI Emerging Markets Index and MSCI World Index have lost 6.88% and 3.65% in March respectively.

The ongoing Russia-Ukraine conflict and the subsequent sanctions imposed on Russia by the West is having profound effects around the globe. The conflict has increased inflation expectations and will likely lead to a slowdown in economic growth, couple this with the fact that the Federal Reserve is in line to start raising the Fed funds rate and you have a recipe for disaster.

Many fear that the above combination could push the US into a recession, which would undoubtedly have ripple effects across the globe. This notion is being reflected in the bond market as the US 2- and 10-year spread (also known as the yield curve) continues to narrow, it is currently sitting at a meagre 0.26% as compared with 0.85% at the start of the year. This implies that the yield curve could invert should the Fed hike rates too aggressively into what seems to be a slowing economy, which in the past has been an accurate predictor of recessions.

The Russia-Ukraine conflict has also exacerbated the rise in commodity prices, which were already on a rampant advance before the war. Most notably, the price of oil hit a 13-year high of $138 per barrel on Monday (March 7). This was before President Joe Biden announced a ban on Russian oil imports and Britain stated that they would also phase out Russian oil by the end of 2022, both of which will likely further impact the oil price to the extent that the market hasn’t priced it in already. Metals have also advanced month-to-date with copper and platinum up 3.99% and 3.25% respectively, followed by the safe-haven gold with 3.76%.

Also at centre stage is the impact of supply chain disruptions and the Russia-Ukraine conflict on food prices. Ukraine and Russia are dominant players in the global grain markets, most notably wheat, with each country accounting for 12% and 17% of the world’s wheat exports respectively. Ukraine is also dominant with respect to corn exports, with it making up roughly 17% of global exports. As such the price of wheat has risen over 50% this year already, followed by corn with close to 30%. The prices will likely remain elevated given the importance of Russia and Ukraine to the grain markets which could jeopardise food security for countries reliant on imports (Data obtained from ING Group).

Given the dire economic environment we currently find ourselves in, it comes as no surprise that US stock markets have been retreating alongside their global peers. The S&P 500 is down 2.19% month-to-date, bringing its yearly return to -10.25%. The tech-heavy Nasdaq Composite index has fared even worse, losing 3.61% and 15.27% month- and year-to-date respectively.

A rise in domestic Covid-19 outbreaks coupled with the global turbulence has caused China’s stock markets to hit their lowest levels this year. The Hang Seng index, which has already been losing ground due to Beijing’s crackdowns and the strict stance taken by China with regards to Covid-19 policies, has officially hit a five-year low after losing 8.03% month-to-date. China’s slowing GDP growth and increased infections, coupled with the ongoing global pressures will likely keep its market under pressure for the time being.

The rand has shown resilience despite the general selloff in risky assets. This is contrary to how one would expect the rand to behave in such an environment, as the rand has generally been seen as a proxy for emerging markets which tend to sell off during times of uncertainty. It is likely being buoyed by strong commodity prices and attractive yields and has thus gained 1.71% against the greenback, 3.53% against the pound, and 3.14% against the euro (all month-to-date figures).

After a strong February which saw the FTSE/JSE All Share Index advance 2.40%, the local bourse has since come under pressure and has lost 3.39% month-to-date. All sectors are down with the worst performer being industrials with -6.57 %, followed by financials with -1.39%, and resources with -1.29%. SA listed property has also lost ground after falling 3.51%. (All returns are month-to-date).

Disclaimer: All returns data are in the respective currency of the region mentioned. All YTD and MTD returns are as at time of writing.

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Mauro Forlin

Global & Local Asset Management


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