Section 2 Market and economic overview – 2022

Key themes:

Global financial markets tumbled in 2022 as risk sentiment waned

The US dollar soared to a two-decade high in 2022 due to rising US interest rates

Commodities benefited from the geopolitical turmoil which raise supply concerns

Global and emerging market bonds plummeted in 2022 as inflation soared

South Africa’s assets outperformed global counterparts buoyed by resources

The year 2022 was partly dominated by the Russian invasion of Ukraine, which brought commodity supply shocks as the two countries are the major producers of energy and food commodities. On 24 February 2022 Russia launched a military invasion of Ukraine. The campaign had been preceded by a Russian military build-up since early 2021 and numerous Russian demands for security measures and legal prohibitions against Ukraine joining the North Atlantic Treaty Organization (NATO).

Russia is the world’s third-biggest oil producer after the United States and Saudi Arabia, producing 10 million barrels per day or about 10% of the global oil supply. Russia is the world’s second-largest producer of natural gas, behind the United States, and has the world’s largest gas reserves. More so, both Russia and Ukraine are meaningful contributors to the global food chain, collectively representing approximately 25% of the total global trade in wheat, 20% of global corn sales and 80% of all sunflower oil exports.

Following the invasion of Ukraine, the United States and its allies imposed sanctions on imports of oil, gas and coal from Russia. Meanwhile, the Euro Union (EU) banned most imports of Russian crude oil and petroleum products, with an exemption for crude oil delivered by pipeline. The sanctions raised supply concerns which saw commodity prices soaring in the first quarter of 2022, given that the European economy greatly relies on Russia for more than half of its gas, and about a third of its oil.

In the US, headline inflation (CPI) came down from an annual average of 8.3% in the first half of 2022 to about 8.0% in the second half of the year, bringing the annual average for 2022 to approximately 8.1%, four times the US Fed’s target and the highest level in 40 years. Headline inflation in the euro area rose sharply from an average of 7.1% in the first half of 2022 (H1 2022) to 9.7% in H2 2022, and 8.3% for the first 11 months of 2022, the highest level on record. Similarly, the United Kingdom’s (UK) inflation rate increased to 7.7% in H1 2022 and 10.4% in H2 2022 to average the year at about 8.9%, a 41-year high.

Meanwhile, in emerging markets and developing economies (EMDEs), inflation reached almost 10% in 2022, on average, the highest level since 2008 and virtually above central bank targets for all the countries following the inflation targeting regime. More so, tight financial conditions and labour market mismatches further added to rising wages, and higher input and production costs, while many EMDE countries experienced large currency depreciations that passed through into higher import, producer and consumer prices.

The US Fed increased the Fed funds rate by 425 basis points (bps) to 4.25%-4.5% in 2022, which has pushed borrowing costs to the highest level since 2007. The European Central Bank (ECB) raised interest rates by a 14-year high of 250bps in 2022, bringing its deposit facility rate to 2.0%, the refinancing rate to 2.5% and the marginal lending rate to 2.75%. The Bank of England (BoE) hiked rates by 325bps in 2022, bringing its interest rate to 3.5% and pushing the cost of borrowing to the highest level since late 2008.

As the Covid-19 pandemic persisted throughout 2022, economic activity was disrupted across the world. China was impacted the most as they battled with several coronavirus waves due to the Omicron variant, with the Chinese government maintaining its zero-Covid policy measures to control the infections throughout the year. The rising infections in China have been caused by low vaccination rates among adults. Following massive protests across major cities in China, the Chinese government announced in December 2022 that it was ending its zeroCovid policy. However, the emergence of a highly transmissible variant (XBB.1.5) is fanning concerns over new mutations. Countries around the world should intensify their vaccination rate to combat the spread of new variants. There are concerns that prolonged coronavirus outbreaks may continue to disrupt global supply and see a bumpy global economic recovery.

Global frequent economic data like the Purchasing Managers Index (PMI) (PMI), industrial production and trade figures for major economies disappointed in the second half of the year, raising global recession concerns. The International Monetary Fund (IMF) projects that the global economy will ease to 3.4% in 2022 from a sturdy growth of 6.0% in 2021 and slow further to 2.9% this year as the highest inflation in several decades, the cost-of-living crisis, tighter financial conditions in most regions, the RussiaUkraine war and lingering Covid-19 concerns are all weighing on economic growth. Advanced economies are set to expand by 2.7% in 2022, down from 5.2% in 2021, and slow down further to 1.2% in 2023.

Meanwhile, emerging markets are expected to grow by 3.9% in 2022 from 6.6% in 2021 and remain stagnant in 2023 at 4.0%.

Global stock markets tumbled in 2022, entering the bear market territory throughout the year as the risk sentiment waned due to the above market drivers. Against this backdrop, the MSCI All-Country World Index (MSCI ACWI) recorded a negative return of 18.0% in 2022 from a robust return of 19.0% in the previous year, in US dollars, with most sectors underperforming while energy was the best-performing sector buoyed by growing supply concerns induced by the RussiaUkraine war. Global equities were negatively impacted by weak performance in emerging markets, the US, Europe and Japan. The S&P 500 Index suffered its worst performance in 14 years, recording an -18.1% return in 2022 from a strong return of 28.7% in 2021 in US dollars.

Regionally, the MSCI Developed Markets Index (DM) marginally protected relative to the emerging markets, recording a negative return of 17.7% in 2022 from 22.4% in 2021, in US dollars, detracted by weak performance in the US and Europe. The MSCI Emerging Markets Index (EM) recorded a negative return of 19.9% in 2022 in US dollars. The emerging markets stocks were negatively impacted by a risk-off environment and prolonged coronavirus restrictions that negatively weighed on Chinese economic activities. The share of Chinese stocks in the benchmark MSCI EM stands at 31.3%.

In the fixed-income market, global and emerging market bonds plummeted in 2022 with treasury yields soaring as major central banks intensified monetary policies tightening to control elevated inflation. The JP Morgan Emerging Markets Bonds Index and the FTSE World Government Bond Index (WGBI) recorded negative returns of 10.2% and 18.3% in US dollars. US cash was the best-performing asset class in 2022, recording a positive return of 1.8% in 2022, in US dollars, as it benefits from the increasing interest.

Major currencies weakened against the US dollar due to tightening financial conditions in most regions to tame inflation, Russia’s invasion of Ukraine, the lingering Covid-19 pandemic, and a broad-based and sharper-than-expected slowdown. The dollar index strengthened by 8.2% in 2022, soaring to a twodecade high of 114.5 relative to other major currencies. The euro and the pound weakened by 5.8% and 10.7% relative to the US dollar as the interest differential widens. The rand tracked the global trend and plunged by 6.9% relative to the US dollar in 2022 with the severe power cuts adding fuel to the global sell-off fire.

Commodities performed well in 2022 as geopolitical tensions raised energy supply concerns, with the Bloomberg (BBG) commodity index gaining by 13.8% in 2022 from 27.1% in the previous year. Meanwhile, the BBG Agriculture and Industrials metals indices increased by 25.3% and 13.2% in 2022 respectively.

Brent crude oil increased by 10.5% in 2022, reaching the 40-year high of $130 per barrel in the first quarter of the year, buoyed by sanctions against the Russian oil supply and random attacks on Saudi Arabian oil storage facilities by rebels. Russia produces 12% of the world’s oil. Gold eased by 0.3% in 2022 due to the stronger US dollar.

South African equities bucked the global trend, with the JSE All Share Index (ALSI) recording a positive return of 4.0% in 2022 from a robust return of 29.3% in 2021, in rands. From a sector perspective, local equities were supported by resources and financials which returned positive returns of 9.5% and 8.5% in 2022, in rands, respectively.

South African bonds outperformed local equities in 2022, with the All-Bond Index (ALBI) returning a positive return of 4.3% in the year, from 8.4% in 2021, in rands, supported by a positive fiscal consolidation path.

Local cash (STeFI) outperformed local bonds and equities, recording a positive return of 4.9% in 2022 from 3.5% in 2021, in rands. It was supported by rising rates which favour the asset class given that returns are linked to the interest rates.

The South African property sector was the worstperforming asset class in 2022 as companies maintained their working-from-home policies. This negatively impacted the office space, with the South African Property Index (SAPY) Index returning 0.6% in 2022 from robust returns of 36.9% in the previous year, in rands.