AN UNNERVING YEAR FOR INVESTMENT MARKETS

AN UNNERVING YEAR FOR INVESTMENT MARKETS

This year started with the promise of a progressive economic recovery as societies returned to a "new" post-Covid normal. Unfortunately, Russian President Vladimir Putin had other ideas when he attacked his neighbours Ukraine in February in an unprovoked act of war, changing our economic expectations for 2022. In response, commodity, energy, and food prices soared to multi-year highs, causing inflation to spiral upwards. In the charts below, the oil price increased from $78 at the start of the year to a peak of $128 per barrel before declining to $94 (figure 1). Natural gas prices (figure 2) reached a high of $9.68 before falling to $5.98, while the price of wheat rose to $12.87 (figure 3) before retracing to $8.28 per bushel. These are products for which Russia and Ukraine are significant exporters to the rest of the world.

Figure 1 - Brent Crude Oil in US$
Figure 2 - Natural Gas in US$
Figure 3 - Weat in US$

Swift and far-reaching economic and financial sanctions imposed on Russia by the United States, Europe, and other NATO-aligned countries added to the heightened level of uncertainty and even talks of a possible third world war. The displacement, injury, and killing of the Ukrainian people, together with the destruction of their cities, is deplorable and heart-breaking. Reserve banks worldwide embarked on a series of interest rate increases to combat rising inflation. The IMF/Bloomberg graphic below illustrates the extent of the tightening of monetary policy since the end of 2021. In South Africa, the SA Reserve Bank increased the bank rate from 3.75% at the start of the year to 7% presently, with further increases forecast in the coming months.

The Chinese economy has struggled for most of the year due to strict COVID-19 lockdowns imposed by the Government. Chinese companies responsible for producing goods and services needed by the rest of the world have struggled to operate at full capacity. Consequently, the global supply of goods from China has been hampered while the demand for commodities and raw materials in the manufacturing process has declined. In South Africa, load-shedding is now a matter of "when" and for "how long" rather than "maybe." The dire state of the Eskom power generation system continues to exert severe strain on our economy's functioning and growth potential.

Investment markets reflected this uncertainty, with the prices of shares on the local JSE All Share Index falling by 14% from the start of the year to the beginning of October. Internationally the US S&P 500 Index was down 25%, and the Dow Jones Index was a negative 21% over the same period. At the time of writing, markets locally and abroad have recovered some of the lost ground. The Rand weakened relative to a stronger Dollar, and government bond yields ticked up.