Written version
- Equity markets cooled off in December following a two-month rally as we came to the end of a highly volatile year. Markets have been on the back foot for most of the year as investors have had to contend with numerous challenges including rising inflation, interest rate hikes, and geopolitical tensions. The Morgan Stanley Capital International (MSCI) All Country World index ended December down 4.1%, while emerging markets outperformed their developed counterparts, with the MSCI Emerging Markets index losing 1.6%, as compared to -4.3% for the MSCI World index.
- Factory activity in the US contracted for the first time since May 2020 as the Institute of Supply Management’s Manufacturing Purchasing Managers Index (ISM Manufacturing PMI) fell to 49 in November. Despite the slowdown in manufacturing activity, the services sector still remains robust with the ISM Services PMI jumping to 56.5 in November from 54.4 the month before. Respondents cited an improvement in supply chains as a reason for the rebound.
- The latest US CPI report surprised to the downside as annual headline inflation slowed to 7.1% in November, beating market forecasts of 7.3%. Annual core CPI, which excludes the effects of volatile items like food and energy, also slowed to 6.0% from 6.3% in October. With inflation still well above the Federal Reserve’s (Fed) 2% target, it raised rates by 50 basis points at its final meeting of the year, marking its seventh consecutive rate hike. While this marks a slowdown in the Fed’s rate hiking cycle, it is still uncertain how long interest rates will have to remain elevated.
- China had some relief on the economic front after policymakers decided to ease some of their stringent Covid-19 restrictions. While the relaxation is expected to inject some growth, the economy is still struggling due to the effects of the over-indebted property market as well as the global slowdown that is underway. This was evident by the drop in the Caixin Services PMI to 46.7 in November, marking the third straight drop. New orders hit a six-month low while sentiment dropped to an eight-month low, both highlighting the fact that many companies are beginning to brace for lower demand.
- The latest estimate showed that the UK Composite PMI advanced to 49 in December, up from 48.2 in the previous month. Underlying data showed a further decline in manufacturing production, whereas activity in the service sector steadied. Despite the slight improvement, it still marks the fifth consecutive month of contractions in business activity and highlights the problems facing the UK economy.
- The UK annual inflation rate also eased to 10.7% in November as a contraction in motor fuels and second-hand car prices eased pressure. Food inflation, on the other hand, hit its highest level since 1977 at 16.5%. Despite inflation beginning to show signs of peaking, the Bank of England (BoE) raised rates by 50 basis points in order to counter the effects of the tight labour market. Andrew Bailey, the BoE governor, stated that they now expect inflation to start falling at a faster pace by late spring.
- Locally, we continue to contend with rising prices, interest rates, and ongoing bouts of load shedding. The outages have led to a slowdown in both the manufacturing and mining sectors with production contracting by 6.3% and 10.4% month-on-month in October, respectively. Retail sales data showed a contraction of 0.6% from a year earlier in October, pointing to the negative impact the rise in prices and interest rates are having on demand.
- Local annual inflation slowed to 7.4% in November from 7.6% the month before. The decline was due to a reduction in the prices of transportation, predominantly fuel. While encouraging, annual core CPI still stands at a five-year high of 5%, unchanged from October, and opens the door for further rate hikes at the South African Reserve Bank’s next meeting.
- South African equities followed global peers lower with the JSE All Share index losing 2.4%. All sectors were in the red with financials, industrials, and resources losing 5.3%, 0.2%, and 3.6% respectively. South African listed property advanced for the third consecutive month after gaining 0.7%.
- One-month index movements:
- JSE All Share Index: -2.38%
- S&P 500 Index (US): -5.90%
- FTSE 100 Index (UK): -1.60%
- Hang Seng Index: 6.37%