Autus CEO, Dominic Ilett, share insights on global and domestic macro factors in our quarterly review.
The impact of political, social, and economic macro factors exerted greater influence on markets than micro factors over the quarter. Locally, the July civil unrest and blatant looting of shops, factories, and trucks in KZN and Gauteng highlighted the existing fragility where high unemployment and hardship experienced by a majority of the population is combined with disingenuous political forces. While the financial cost and losses from these events are still being tallied, the capital required to repair the damage could have been better used to fund corporate investment, growth, and job creation.
GDP growth for 2Q21 of 1.2% q/q (from 1.0% q/q in 1Q21) marginally surprised to the upside. Positive contributors include transport, personal services, and agricultural sectors. For 2021, growth of 4.1% is forecast slowing to 2.2% and 1.4% in 2022 and 2023, respectively. Real GDP is therefore only expected to reach the pre-pandemic 2019 level in 2023. Inflation was 4.9% in August and may tick higher in the coming month due to fuel hikes and a weaker rand. While the Reserve Bank is expected to keep the repo rate unchanged at 3.5% for the rest of the year, there is an increasing risk of a hike sooner should inflation data be more negative than anticipated.
Globally, the direction and pace of US inflation and global growth were top-of-mind of global investors. The US Federal Reserve signalled that they are inching closer to reducing the monthly financial stimulus of approximately US$ 120bn provided to the market. This financial tapering is widely seen as a precursor to hiking interest rates next year depending on whether higher inflation is transitory or more structural. US growth of 5.9% is projected for 2021, a reduction from earlier forecasts of above 7% as the prolonged effects of COVID and global supply constraints hinder economic progress. In Europe, the ECB indicated that they would trim emergency bond purchases in 4Q21 as high vaccination rates across Europe bolster recovery prospects. The ECB upgraded its growth forecast for this year to 5% from a previous 4.6%. Inflation expectations were lifted to 2.2% this year, falling to 1.7% next year and 1.5% in 2023 – well below the ECB’s 2% target. China had a tumultuous quarter as the government clamped down on consumer protection and anti-competitive behaviour. A resurgence of COVID-19 infections forced the lockdown of some cities adversely affecting economic activity and further disrupting the constrained supply of goods to world markets. A sharp and broad-based falloff in economic activity in July surprised to the downside with industrial production, fixed-asset investment, and retail sales growth all weakening.
Analysts expressed increasing concern about the “unbalanced” and “unstable” recovery and the mounting array of growth pressures facing the Chinese economy. We anticipate that investment activity in 4Q21 will again be led by reserve bank responses to the emerging trends in inflation, interest rates, and growth.
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