When a perfect storm hits the markets …

Global equities fell, bond yields rose and the dollar gained in September.
Local follows global – and after last month’s declines, local bonds and equities are even more attractively priced. Image: Kiyoshi Ota, Bloomberg

Every once in a while, investors collectively decide that risks that were lurking in the background are now worth paying attention to. When that happens markets can endure serious wobbles.

This is pretty much September’s story, when a perfect storm of three risks suddenly loomed larger than before: inflation (and interest rates), Chinese property, and the US debt ceiling.

Dancing on the ceiling

Starting with the latter, the debt ceiling is a self-imposed limit on the total amount of allowable outstanding federal debt. Ironically, it was initially put in place to make borrowing easier.

Before 1917, the US Congress had to approve every single loan.

During World War I, the law was changed to provide the US Treasury with greater flexibility to borrow as needed, provided total debt was below a certain level. This limit was routinely raised without fanfare, but in the last three decades lawmakers have started using the debt ceiling as a political tool.

Even worse, Congress already approved the spending, but now it cannot agree on approving the associated borrowing. In other words, this is not about prudently limiting future borrowing, but about paying for bills already incurred.

The US government has now hit the debt limit.

Once cash reserves run out it cannot meet financial obligations like paying salaries in full.

From the market’s point of view, the worst-case scenario is a failure to make interest payments, a default on what are supposed to be the safest assets in the world and the bedrock of global financial markets.

Though Congress hastily approved a bill last week to suspend the debt ceiling until December, that is merely kicking the can down the road. A longer-term solution is needed, and is likely to emerge, but is still caught up in the political bickering over President Joe Biden’s two other big spending plans on physical and social infrastructure.

Winston Churchill, whose mother was American, famously said you could count on the US to do the right thing, but only once they’ve tried everything else. Previous episodes of debt ceiling brinkmanship did not end up having a major market impact.

Nonetheless, this is a shambolic way of running the finances of the world’s largest economy.

In contrast, as an aside, South Africa’s budgeting and debt management process is extremely orderly and transparent even if total debt levels are too high. Investors, taxpayers and the public always know what to expect over the next three years.

The real state of real estate

On the other side of the world, the focus in China was on a potential restructuring of heavily indebted real estate developer China Evergrande, which missed a key interest payment. It’s clear that it is unable to fully repay its enormous pile of debt and other obligations. The only question is what the impact will be.

While Evergrande’s share and bond prices have predictably crashed, there is no sign yet of a broader financial panic, such as a run on the banking system or wholesale funding markets.

Beijing will probably attempt an orderly piecemeal dismantling of the giant developer and, given its deep pockets and centralised control, can pull it off. But weakness in the broader real estate sector, a driver of the country’s breakneck growth over the past three decades, is likely to persist or even worsen. There seems to already be an oversupply of housing.

With developers across the board likely to find it much tougher and more expensive to fund themselves, new building activity could slow to a crawl [in China].

There are short-term worries too. Growth in the world’s number two economy is already struggling from Covid-19 lockdowns and now has to contend with power outages that have sent the September manufacturing purchasing manager’s index into contractionary territory below 50 index points. With China and Asia more broadly being the world’s factory, the electricity blackouts and Covid-19 outbreaks across the region have intensified the global supply-chain problems.

Tenacious inflation

This brings us to inflation. The surge in inflation is still largely a function of pandemic-related distortions. Companies everywhere face rising costs and shortages of key inputs, including labour.

Energy prices over the past year

Source: Refinitiv Datastream

Recently, energy prices have shot up, particularly natural gas prices in Europe. Though higher oil and gas prices will have a direct impact on a consumer price index, these tend to be short-lived.

However, when higher energy costs cause companies across a broad range of sectors to raise their selling prices, we have a so-called second-round effect. This is when we should start feeling uncomfortable. And then if workers bid up their wages in response, we have the beginnings of a wage-price spiral.

Clearly, this requires that companies have pricing power and workers bargaining power. Farmers, for instance, face rising costs for diesel and fertiliser, but cannot raise prices. In a global marketplace, they are price-takers. But in other industries, demand is strong enough for firms to dare raise prices, while the pandemic has left many sectors short of workers, forcing wage increases.

These are still early signs, but something investors are becoming more nervous about.

It doesn’t help that petrol pumps across the UK have been running dry, recalling the fuel lines of the 1970s, the era of dreaded stagflation. A shortage of truck drivers in the UK is the main reason these petrol stations cannot refill quickly, but supply disruptions across the energy universe in oil, gas, coal and refined products is a global phenomenon. The weather has also played a big role.

The end (of free money) is nigh

The major central banks insist that such pandemic-related distortions will eventually fade, and that will lead to the current inflation surge abating. But they are also laying the groundwork for removing emergency monetary support. After all, when the pandemic is no longer distorting the economy, those emergency measures will not be needed anymore.

First up is the US Federal Reserve, which will in all likelihood start gradually tapering its monthly bond purchases from December or January. It could start raising rates by the end of next year.

The Bank of England also recently indicated that it could start raising rates in the “medium-term”.

The European Central Bank is far away from rates increases, but will probably reduce the scale of its emergency bond buying early next year.

The Bank of Japan, as always, is a special case. Japan seems to have escaped the global inflation surge and consumer inflation there is still a big round zero.

Emerging markets have been increasing rates in droves, with a total of 11 hiking in [September] (though South Africa stayed on hold).

In other words, the era of free money is coming to a close. This doesn’t mean of course that rates are about to rocket higher, killing off the global economic recovery. All indications are that central banks will be gentle in removing stimulus. But higher rates can negatively impact share prices by putting downward pressures on company valuations.

In other words, if investors are prepared to pay less for each dollar of profits, even if the profits themselves are otherwise unaffected. Of course, higher borrowing costs can also reduce profitability.

So what was the market response to these three rising risks?

In simple terms, global equities fell, bond yields rose and the dollar gained.

There were few places to hide.

Global asset class performance over the past year in US$

Source: Refinitiv Datastream

After a run of seven straight positive months, it should not have been a huge surprise that global equities were negative in September, but the decline was severe with the MSCI All Country World Index experiencing its worst month in a year. It fell 4% in US dollars, reducing the year-to-date gain to 11%. Over 12 months, global equities returned 28%, benefiting from strong growth in corporate earnings.

The benchmark US 10-year Treasury yield increased from 1.3% to 1.5%, but remains extremely low in absolute terms. However, when yields are this low, even small movements can cause big capital losses. The Bloomberg Global Aggregate Bond Index lost 1.8% in dollars in the month. This means the global fixed income benchmark has lost 4% so far this year.

Global listed property was also sharply negative in September, with the FTSE/EPRA Nareit Developed Index losing 5.8% in dollars, cutting the year-to-date return to 15% and the one-year return to 29%. This is ahead of global equities and impressive considering how badly parts of the sector have been hit by the pandemic.

Local followed global

Local equities followed global markets lower in September. The FTSE/JSE Capped SWIX lost 1.4% in the month, which reduced the return for the first nine months of the year to 16.9 % and the 12-month return to 30%. The third quarter return was 3%. The FTSE/JSE All Share Index lost 3% in the month. It has a greater weighting to mining shares.

Local asset class performance over the past year in rands

Source: Refinitiv Datastream

Weaker industrial and precious metals prices pulled down the shares of mining companies, particularly platinum group metals miners, but Sasol shot up on higher energy prices. The resources index lost 9% in the month, reducing the year-to-date return to 8.7% and the one-year return to 17%.

The industrials index was marginally negative in September. It lost 0.7% in the month, dragging year-to-date returns down to 9% and 12-month returns to 17%.

On the other hand, financials were positive again in September, gaining 2%. This means financials are ahead on a year-to-date and one-year basis, with returns of 26% and 51% respectively. It means the financial index has finally regained pandemic-related losses.

Listed property was marginally lower in September. The FTSE/JSE All Property Index lost 0.3% in the month, but the 12-month return remains impressive at 58%. Despite this strong recovery, the index has yet to return to pre-pandemic levels.

Local bonds sold off with their global counterparts, and the All Bond Index lost 1.9% in the month. However, the year-to-date return of 5.4% and one-year return of 12.6% is still well ahead of cash.

In summary

It was a September we’d rather not remember.

At least the currency played the role of shock absorber. The rand lost 4% against the dollar in the month, cushioning the blow from declines in global equity prices. This highlights the importance of having multiple sources of return in a portfolio.

Moreover, we should remember that markets never move up in a straight line. Corrections are normal as investors reassess growth prospects and risks from time to time.

The benefit long-term investors have over traders is that they don’t need to show a profit every month. Instead, they can wait patiently for opportunities to emerge and value to be unlocked.

Following last month’s declines, local bonds and equities are even more attractively priced.

Izak Odendaal and Dave Mohr are Old Mutual Wealth investment strategists.


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Market technicians say that the fundamental reasons that explain the current technical setup only appear much later. Also, that breaking fundamental news confirms the direction of the established trend. Every correction that creates a new buying opportunity has to be driven by some fundamental event.

Corrections occur regularly but the fundamental drivers are different each time. Every moment in the market is unique, but over the longer term the trend is a function of liquidity, and the Federal Reserve controls liquidity. This implies that the market can only correct if the Fed allows it to and that the market can only rise if the Fed wants it to.

Forget the popular excuses of “irrational exuberance” that chase the market higher, and investor pessimism that crashes markets. Credit expansion or contraction drives the markets up or down. Investor sentiment is a function of the availability of cheap credit. The price and the supply of credit determine the value of listed assets. We can experience the much-anticipated corrections but is impossible for the market to enter a bear market while interest rates are negative in real terms, as they are now.

To cut a long story short – relax, everything is perfectly normal and under control.

There a numerous ‘relax, everything in normal’ moments in the stock markets over the last few hundred years, and your impossible may just become possible.

Well, let me put it this way. Since the 1920s there has never been a crash while the yield curve was normal and the market crashed every time after the yield curve inverted. That is a pretty good leading indicator I would say. Anyway, I am lying in ambush, waiting for buying levels on FANG stocks.

May your endeavors be profitable.

Well, when the markets do correct in a significant way or crash, that’s your opportunity to buy buy buy. But buy wisely. Buy when others are panicking and dumping their stocks.
Moments in history such as the y2k “crisis”, the US 911 crisis, the 2008 housing crisis and most recently, the initial covid lockdown.. March to June 2020, represented golden opportunities to make lots of money.

The following comment by Vanguard may also shed some light on the topic. Keep in mind that the debt levels of all governments are at record levels and most commentators want us to believe that this will lead to a crash of epic proportions. In reality, the opposite is true.

“The government debt/GDP ratio has had a positive relationship with the long-term realized return. In other words, higher government debt
levels have been associated with higher future stock returns, at least in the United States since 1926”

Your lack of Bitcoin knowledge is astounding. Right now, it would take about R200k in hardware and 5 years of continuous mining before you reach the equivalent of a single Bitcoin (~$51k).

This was aimed at Beeswax’ comment on Bitcoin. Ignore my fat digits.

Yes I agree with you that very few investments have beaten BTC or the other virtual coins. I can also guarantee you that if I get in now they will crash 🙂

However I still disagree with you on the production of virtual coins.
In IT, anything created by a human can be improved or broken by another smarter human.

The US markets has not crashed before with interest rates this low.

Talking of trends oil has just broke a 13 year down trend.

With the Rand also a bit suspect the Reserve Bank might pull the trigger next time around. If they don’t it will be very surprising.

zero-interest-rate-policy until bust, baby.

buy anything physical

Well these fin gurus always got it figured out..

Never mind world pandemic Corona?
Never mind broken supply chsins?
Never mind inflation?
Never mind the financial system is rigged..

Yet they sound as if they got it figured out

It is very far from the truth, they actually do not know a lot.
They just tell everyone what everyone wants to hear to calm the storm.

Look at the behavior before every crash, 2008, arrogant and super confident.

The US has borrowed way too much to fix previous emergencies, no more money to fix the next one.

The US has printed 30% more Dollars since March 2020.

The WAR in Afghanistan was just a reason to spend US tax payer money on projects the Afghanistan people sometimes did not ask for ($2 Trillion).

I do not know why the rest of the world listens or follows the US.

Another go at higher interest rates, well yes, interest rates will stay very low forever. Easy to understand, personal debt too high to justify higher interests. More noise than anything else. Interest rates are rather coming lower or the same than higher.

If interest rates ever will be raised, maybe 1% over the next 5 -7 years, the economy is not growing for so long to support higher interest rates and the super cycle on resources will pass sooner than later (2 -3 years), furthermore do we have NHI, EWC and a compulsory pension fund contribution coming with BBBEE & EE policies. Pensioners will be seriously affected by this.

Meanwhile bitcoin hit 50k again. Wonder why the rich don’t want you to have it. We know they say one thing and do another.

BTC can be wiped out in one week, there is no intrinsic value, just a digital coin which almost any IT professional can produce.

You just need the US/UK/EU/China to bring out new legislation or use some anti-terrorism law or excuse and it will crash.

Physical Gold or Silver will show O/Z or KGs(s0 on a scale.

He reads the brochure. Got your script straight from communist china. I will sit back and let purge coin lecture you.

Sorry @Beeswax, your lack of Bitcoin knowledge is astounding.

Right now, it would take about R200k in hardware and 5 years of continuous ‘mining’ before you reach the equivalent of a single Bitcoin (~$51k). So no, it’s got very little to do with IT professionals.

Very true, bitcoin however will surpass $400,000. Not because bitcoin got stronger but because all other currencies are being devalued.

This pathetic lie that bitcoin does not have any intrinsic value is such a false and misleading statement, made by people who have never ever made a single transaction using it.

For me bitcoin is a piece of art, that creates certainty based on two fundamentals:
1) No single entity has control over it, only the individual owners who do not know each collectively control the market price.
2) 51% of bitcoin is in the hands of people who own less than 10 Bitcoin out of 21 million units of which 1,000,000 is missing (more or less)…

The central banks are Expropriating Value Through Inflation with all their money printing, if we did not have this money printing then fiat would have intrinsic value because prices would generally fall for most products whilst new better products would cost more then their prices would deflate at competition increases.

I’ll do you all a favour and give you a free audible book that you would normally pay over R400 for.

Listen to The Bitcoin Standard by Saifedean Ammous on Audible. https://www.audible.co.uk/pd/B07D81CQBJ?source_code=ASSOR150021921000V

“local bonds and equities are even more attractively priced.”

There is a reason for this pricing-its called risk and the risks of the country collapsing due to corruption, broke SOEs, BEE, EWC, NHI, EE, colossal unemployment, useless public health services, hopeless crime, courts , police etc.

Our ZAR 10 year bonds trade at a premium of 770 bps over the dollar 10 year, and 850 bps over Greek 10year bonds!! The market is seldom incorrect especially about our solvency and future.

In my view-local assets are correctly priced but I would love to be wrong!

In the bond market, it is called the ANC premium and all of us pay it. In the share market, it is the ANC discount, and all of us finance it. Borrowers and savers, O yes, and taxpayers, pay for the ANC disaster. The unemployed don’t benefit. The members of pension funds certainly do not benefit. Businesses and taxpayers do not benefit. The poor don’t benefit either.

Who votes for the ANC then?!

Everybody who depends on govt to survive financially votes ANC, namely:
1.) Parents of child welfare grant recipients
2.) Pensioners who get a state pension
3.) Tenderpreneurs and their dependents of voting age
4.) State employees and their spouse/s of voting age

Question is what these people who vote for a living will do when the money runs out.

I would have thought that the eff fellow, being “economically” minded, would have made some comment or advice or have a thought! I’m holding my breath, in anticipation….

The September stock market correction has created a nice bullish setup for the final rally to the top of this 13 year bull market, supported by numerous technical and fundamental indicators. These gains could be significant over a short period, all thanks to free money, which continues to fuel the stock market!

And no one is seeing the huge red flag ‘FREE MONEY’


FREE MONEY + SHARE BUYBACKS using this helicopter $$ creating a stock market built essentially on sand…..!

Well, as they say, there is no free lunch.

And this next market implosion will catch most judging by the comments here.

End of comments.




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