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Market and economic overview – 2021
Key themes:
Global economic growth strongly rebounded • Supply-side constraints and fiscal stimulus drove inflation higher • Global financial markets delivered another year of double-digit returns • Local asset classes were all positive
Global economic growth strongly rebounded in 2021
Following a contraction of 3.1% in 2020 – the worst global recession since the Great Depression – global economic growth strongly rebounded to 5.9% in 2021, supported by robust fiscal and monetary stimulus rolled out by several countries. Furthermore, positive coronavirus vaccine developments also led to further easing of the lockdown restrictions as countries rolled out inoculations. This rebound was driven by both advanced economies (AEs) and emerging and developing economies (EMDEs) that recovered to 5.2% and 6.4% respectively from contractions of 4.5% and 2.1% in the prior year.
Table 1: Consensus forecasts on economic growth and inflation from selected regions
Global AEs2
US Euro area UK EMDEs3
Brazil Russia India China South Africa Economic growth
2019 2020 2021 20221 Inflation
2019 2020 2021 20221
2.8 -3.1 5.9 4.4 3.5 3.2 4.3 3.8 1.7 -4.5 5.0 3.9 1.4 0.7 2.8 2.3 2.3 -3.4 5.6 4.0 1.8 1.2 4.7 4.4 1.5 -6.3 5.2 3.9 1.2 0.3 2.5 1.5 2.3 -3.4 7.2 4.7 1.8 0.9 2.5 4.0 3.7 -2.1 6.5 4.8 5.1 5.1 5.5 4.9 1.4 -4.1 4.7 0.3 3.7 3.2 8.3 6.0 2.0 -3 4.5 2.8 4.5 3.4 6.7 6.1 4.0 -7.3 9.0 9.0 4.8 6.2 5.6 4.9 6.0 2.3 8.1 4.8 2.9 2.4 1.1 2.2 0.1 -6.4 4.6 1.9 4.1 3.3 4.5 4.8
Sources: Bloomberg, IMF and Alexforbes
Lockdown restrictions across the world increased when the Delta variant of Covid-19 spread, resulting in renewed supply-side constraints (delaying production and the transportation of goods). This:
•increased raw materials and shipping costs, along with the rise in food and oil prices • exacerbated inflationary pressures, which had been driven by unprecedented fiscal and monetary stimulus implemented by many countries since the beginning of the pandemic
In AEs, the stimulus focused on households support through fiscal cash transfers and reductions in central bank’s interest rates to the 0% lower bound in most countries. This resulted in faster growth in household consumption spending, the build-up of demand pressures, and rising consumer price inflation. US inflation accelerated to 7.0% y/y in the last month of 2021, a new high since June 1982 compared to 6.8% y/y in November 2021. For the year 2021, the US inflation average is 4.7% from 1.2% in the previous year.
In the UK, inflation has risen to the highest reading since March 1992 of 5.4% y/y in December 2021 from 5.1% y/y in November 2021, bringing the full-year average to 2.5% from 0.85% in the previous year. The Euro area inflation rate reached an all-time high of 5.1% y/y December last year, bringing the full-year average to 2.6% from 0.25% in 2020 (Figure 1). Policymakers and the market now believe that the rise in inflation is persistent rather than transitory.
By contrast, EMDEs had limited household support through cash transfers. Monetary policy support started to reverse as inflation also started to increase (Figure 2) and several central banks started to hike interest rates. Fiscal support to companies also reduced relative to 2020.
UK Euro area CPI target US Japan
Indonesia China SA
Sources: Bloomberg and Alexander Forbes Investments Turkey Brazil Mexico India
Global financial markets stocks have delivered robust returns in 2021 on better global growth, which had been supported by the coordinated monetary and fiscal stimulus measures. However, the robust vaccination drive by developed countries meant economic activities returned to normal in many parts of the globe with improved global growth optimism. Better economic data, easing coronavirus cases in some parts of the globe and dovish major central banks throughout the year also supported the risk sentiment in the markets.
However, the emergence of new variants, the property debt crisis in China, slow global growth in the second half of the year, and surging prices caused by supply constraints somewhat weighed on the risk sentiment in 2021. Major central banks changed their views on inflation being transitory as it was proving to be persistent and they embarked on withdrawals of their monetary policy stimulus.
On the back of these developments, the MSCI AllCountry World Index (MSCI ACWI) recorded a sturdy return of 19.0% in 2021 from 16.9% in the year 2020 in US dollars. Regionally, MSCI Emerging Markets (EM) equities underperformed developed markets equities in the year 2021 on a range of issues:
•Fears of earlier withdrawal of monetary fiscal stimulus by major central banks on surging inflation • The property debt crisis and regulation conundrum in China • Sluggish vaccination in some parts of the EM countries that weighed on the risk sentiment
The MSCI EM index returned negative returns of 2.5%% while the MSCI Developed Markets (DM) index rallied, returning 22.4% in the year 2021 in US dollars.
It was not the year for the fixed interest market as investors favoured risky assets on strong global growth optimism and plentiful liquidity, which supported global financial markets. The FTSE World Government Bond Index (WGBI) recorded a negative return of 7.0% from a 10.1% gain in the preceding year in US dollars. Emerging market bonds tracked developed market bonds, with the JP Morgan EM bonds index recording a negative return of 9.2% in 2021, as their currencies depreciated significantly against the US dollar.
Cash wasn’t king in 2021. Major central banks cut interest rates close to zero to support their respective economies, as asset class returns are linked to the interest rates. The US cash index recorded a positive return of 0.3% in 2021 from 1.2% in the year 2020 in US dollars.
Commodities weakened on global growth slowdown concerns
In commodities, Brent crude oil increased by 50.2% in 2021 buoyed by recovering global demand as countries rolled out Covid-19 vaccination, which eased lockdown restrictions in most parts of the globe. Soaring natural gas and coal prices drove a switch to fuel for power generation and heating. Furthermore, the Organization of the Petroleum Exporting Countries (OPEC) and allies were hesitant to increase the current output policy as demand for petroleum products rebounded.
Meanwhile, iron ore prices tumbled by 36.6% in 2021 as China pushed to restrict steel production. Slowing property construction in China has dented manufacturing of engineering machinery, while its zero-Covid-19 strategy continued to weigh on consumption recovery. Silver and platinum decreased on increasing global growth pessimism in the second half of the year. Gold decreased by 3.6% in 2021 on the stronger US dollar.
Major currencies weakened against the US dollar as risk sentiment deteriorated in the second half of 2021
Major currencies weakened against the US dollar on risk-off trade, driven by:
•fears of early normalisation by the US Fed on surging inflation expectations • • • the slowdown in global growth the Chinese property debt crisis the discovery of the Omicron variant
The dollar index (DXY) strengthened by 6.4% in 2021. The euro depreciated by 6.9% in the year while the British pound weakened by 1.0% in 2021. Following the global trend, the rand depreciated by 8.5% to a high of R15.94. The Turkish lira was the worst-performing currency against the US dollar, depreciating by 78.8% as Turkey’s President Tayyip Erdogan fired governors who supported interest rate hikes to curb inflation. The president believes that higher interest rates impede economic growth.
Local asset classes were all positive in the year 2021
South African equities tracked the global trend, with the JSE All Share Index (ALSI) recording a positive return of 29.3% in 2021 from 7.1% in the year 2020, in rand terms, performing considerably better than other EM counterparts. From a sector perspective, local equities were supported by resources, financials and industrials, which recorded sturdy returns of 32.4%, 29.0%, and 26.7% respectively in rand terms. Discussions around the reduction of bond purchases in the US, the slowdown in China, different coronavirus waves, and unrests in the country somewhat negatively weighed on the risk sentiment in the year 2021.
South African bonds underperformed local equities but recorded positive returns, with the All-Bond Index (ALBI) returning 8.4% in 2021 from 8.7% in 2020 buoyed by the fiscal consolidation path. Local cash returned a positive return of 3.5% in 2021 in rand terms. The prospect of the earlier hiking cycle favoured the asset class, given that returns are linked to the interest rates.
The South African property sector was the bestperforming asset class in the year 2021, with the South African Property Index (SAPY) returning 36.9% from the worst plunge of -33.7% in the year 2020, in rand terms. The sector was supported by the further easing of the lockdown restrictions where most people returned to their work. However, different coronavirus waves and the detection of the Omicron variant will have a negative effect on the asset class over the short to medium term.
South Africa’s economic growth is expected to rebound strongly in 2021
South African GDP growth is expected to rebound by 4.5% in 2021 following a 6.4% coronavirus-induced contraction in 2020. This is slower than our previous forecast of 5%, given the continuous moderating global growth dynamics despite the relatively supportive base effects from last year, and the onceoff commodity price super-cycle.
The local economy will moderate further in 2022 and post growth of 2.5% before reverting to a low growth trap with an average expansion of 2% over the medium term, trailing behind other emerging and developing economies and key trading partners. More so, the current policy environment, the slow progress in the implementation of key structural reforms, and Eskom’s incapability to provide sustainable energy consistently pose a great risk for fixed investment prospects.
Muted demand-pull inflation points to a moderate rate hiking cycle
South Africa’s inflation has been rising significantly since March 2021. It peaked at 5.9% y/y in December 2021 (Figure 3), the highest rate since March 2017, and was close to piercing the South African Reserve Bank’s (SARB) upper bound target of 6.0%.
For the full 2021, headline inflation averaged 4.5%, exactly on the SARB’s midpoint target compared to an average of 3.3% in 2020. Headline inflation is expected to average 4.9% in 2022, slightly higher than our projection of 4.7% while core inflation – which excludes food and non-alcoholic beverages, fuel and energy – is forecast at 3.8% in 2022.
After the SARB aggressively cut rates by a cumulative 300 basis points in 2020 to cushion the devastating impact of the coronavirus on the domestic economy, the Monetary Policy Committee (MPC) decided to raise the repo rate by 25 basis points to 3.75%. This was due to the upside risks to inflation pressures brought by rising electricity prices and other administered prices as the main drivers of the forecast.
Figure 3: While headline inflation rises, demand-pull inflation remains muted
Figure 5: Global asset class performance in US dollars – 2021 Figure 4: Outlook for interest rate
Headline CPI
Upper bound Core inflation
Lower bound Midpoint
Sources: Stats SA, SARB and Alexander Forbes Investments
Risks to the domestic economic outlook
Following the pandemic-stricken economic environment, we expect a rather protracted and subdued growth recovery. This is mainly due to lower government spending in addition to the continued impact of the pandemic on the global and domestic economy for longer than initially anticipated.
SARB forecast (e.o.p) AF forecast
More so, the renewed power constraints will have a negative effect on the recovery. Lack of aggressive implementation of reforms to boost investment means that real GDP is likely to revert to pre-Covid-19 growth levels in 2023 or later.
Sources:Bloomberg and Alexander Forbes Investments
