FINANCE GUIDE UNIT2022 NETWORK FOR INVESTING AND TRADING
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ACKNOWLEDGEMENTS
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AUTHORS: Alec Lu, Alice Guan, Amante Abela, Anna Simpson, Annie Wang, Belinda Chien, Carolyn Cen, Christina Pletneva, Daniel Lum, Dom Goddard, Ethan Proutt, Gerry Lu, Harry Martyn, Isabelle Tang, Jeremy, Keane, Mingxi Shen, Nimay, Tiffany Tang
DESIGNERS: Alec Lu, Alice Guan, Belinda Chien, Carolyn Cen, David Wang, Gerry Lu, Jeremy Huang, Keane Nguyen, Mingxi Shen, Tiffany Tang
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CONTENTS 05 Australia ASX 04 Introduction 13 20 27 China SSE Japan JPX Hong Kong Hang Seng 39 Canada TSX TABLE OF 43 UK LSE 48 Saudi Arabia Saudi Stock Exchange53 South Africa JSE 03 33 US NYSE Europe ENX59
The aim of the publication is to enhance UNIT’s mission of educating motivated university students and bridging the gap between personal investing and university Weknowledge.hopeyou find this Guide useful in assisting with your studies, future careers and understanding of finance. Happy reading!
Welcome to UNIT’s 2022 Finance Guide!
This Guide provides a comprehensive overview of ten different exchanges across the world. It aims to break down the events happening in that specific region, highlight the subsequent consequences of such events in terms of market movements. In particular, asset classes such as equities, fixed income, commodities, foreign exchange will be touched on. Finally, each chapter will shed light on some key risks which have affected the specific asset class in recent years.
INTRODUCTION
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Additionally, Australia’s dependence on China has strained their economic growth. China’s strict focus on fulfilling their COVID-zero strategy has been inefficient for their economy, as the continual lockdowns have impacted businesses and supply chains.
China’s imposition of tariffs on Australian agricultural products has significantly led to the economic loss of farmers. This has been demonstrated by the 80.5% tariff on Australian malt barley in 2020. Australian barley growers have consequently revealed their loss of $35 per tonne having to sell their quality malt barley to other markets as livestock feed. Since China is a major buyer of Australian mart barley, this demonstrates the reduced global buyers of Australian commodities.
Further, Australia is experiencing an economic crisis where we have seen significantly inflated prices. The Central Bank’s choice to increase the cash rate has been a reaction to mitigate the destructive consequences of inflation, with expectations to hit 2.6%. Hitting the 2.6% will be reflective of Australia’s economic contraction of 1.5%.
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Nicholas Burns (United States Ambassador to China) stated that the “zero-Covid policy…has had a major impact” on businesses, with reference to how the financial hub, Shanghai was also forced to lockdown. This had a huge effect upon Australia’s economy where supply chain disruptions have weakened demand for resources like iron ore.
It has long been said that when the United States sneezes, the world catches the cold. While CommSec predicts that the Australian share market will rebound by 79% over the financial year 2023, sharemarket volatility will likely continue alongside global recession fears as Australian shares track Wall Street.
EQUITIES
However, with inflation not expected to peak until later this year, market sentiment has largely been driven by questions about how much further the RBA will have to increase interest rates. One the one hand, Westpac are forecasting a peak cash rate of 3.35%, warning that inflation would get out of control if the Reserve Bank fails to keep hiking rates. On the other hand, CBA warns that if the cash rate exceeds 3% the risk of house prices crashing rises alongside the risk of a recession as households are put under increased financial strain.
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In the financial year 2022, high and rising inflation accompanied by the prospect of aggressive monetary tightening weakened the performance of Australian equities, with the All Ordinaries index and S&P/ASX 200 both falling by around 10%. Despite considerable volatility brought on by persistent supply chain disruptions and Russia’s invasion of Ukraine, the S&P/ASX 200 has recently recorded its fourth weekly rise as market expectations for rate hikes come off.
With Australia’s iron ore export earnings worth $133 billion in 2021–22, Australia is the largest iron ore producer in the world. Despite a volatile 2021, iron ore prices remained relatively stable in the recent June quarter, averaging US$130 a tonne following a rebound from lows of US$80 a tonne in November 2021. Since then, prices have been more volatile, falling from over US$140 in early June to a little over US$100 in mid-July. Although prices have recently reversed course to the upside ($US111 a tonne), several headwinds impede a sustained iron ore recovery. Notably, given China accounts for 69% of the world’s iron ore imports, price recovery is dependent on Chinese steel demand, which may be weak amid lockdowns, an emerging property crisis and heightened geopolitical tensions. Additionally, significant downside risk for prices may be the prospect of new supply, with Australian export volumes alone expected to rise by 53 million tonnes to 929 million tonnes by 2023–24.
COMMODITIES
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Australia’s metallurgical (steel-making) and thermal coal export earnings have risen strongly in the past six months as global supply disruptions intensify. Indeed, coal prices reached historic highs earlier in the year as the Russian invasion of Ukraine acted as a supply shock to an already tight market. Although metallurgical coal prices have been particularly volatile, ranging from US$198-$439 a tonne in the past financial year, prices are expected to fall by almost half to around US$240 a tonne by 2024 as supply conditions normalise. Similarly, as climate-related and pandemic disruptions ease, Goldman Sachs anticipate that thermal coal prices will fall from an average of US$212 per tonne in 2022 to US$110 a tonne in 2024. Given China plans for rapid decarbonisation and energy independence, Chinese demand for Australian coal is likely significantly lower in the medium-term even if Beijing reverses its current ban on Australian coal imports.
Since the start of 2022, yields for 10y Australian Government bonds have risen to 3.44% from about 1.74%. Treasuries continue to rise with expectations now being held that central banks around the world will take a more dovish approach to inflation, in fears of sparking a recession. However, there is still contention about cash rate expectations in Australia, with AMP’s Chief Economist Shane Oliver expecting the cash rate to peak at 2.6% within the next 12 months, whilst noting that a 3% forecast is too high. On the other hand, bond markets have been placing the benchmark rate at 3.2% by Christmas, reaching a peak of 3.6% by next Easter.
Throughout 2022, the Australian bond market has seen a large surge in bond yields, in response to the expectations of the RBA’s aggressive rate hikes to combat high inflation. This steep pace of OCR increases, amounting to a 175 basis point increase to 1.85% (September 2022) over 4 months, has not been experienced by the Australian debt market since 1994 However, the larger effect of this change on the Australian economy and specifically the bond market is still likely to result in the following months.
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FIXED INCOME
In Australia, as seen in the graph below, bond markets have experienced a tighter spread between short and long-dated ACGB yields, hence resulting in a flatter yield curve. This serves as an indication of the market’s expectation of rate hikes in the near term, as well as the loss in confidence of growth following these hikes, particularly with looming recession sentiment. With an inverted US yield curve, the deepest inversion since 2000, this has historically served as a reliable predictor for recessions.
Looking forward, buying opportunities for bonds have emerged for investors who expect increasing bond prices and contracting yields, as bonds have been oversold. Notably, the AOFM have recently issued and plan to continue to issue approximately $125bn of Treasury Bonds throughout 2022-23. Further, assuming the RBA is successful in effectively lowering and managing inflation in 2022-23, this shows strong promise for the Australian debt market, given the fact that bonds tend to outperform equities during recessionary periods, as they are viewed as ‘risk-free’ or safe haven assets. The corporate bond market has also been attracting attention given its elevated spreads, with NAB senior debt yielding 4.1% and BOQ AAA rated covered bonds yielding 5.1%.
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However, with the recession and forecasts commodity prices Australian exports be able to be held and thus it is likely against safe-haven and JPY. Notably, that Australia’s biggest China, seeks to lim imports, and thus expected to weaken this year.
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FX
As a result of the relative to the subsequently weakened This was most notable AUD/USD fell 5.6% peak of 75c, its biggest over 2 years. This 25bps rate hike in RBA continued to cash rate of 0.1%. the story for the Aussie, decision to make hikes, due to the made 75bps increases 2.5%. The AUD has down by the Chinese crisis, and due to t wars. Nonetheles 2022, the Aussie against the Euro, GBP and Yen.
Our bilateral relationship with China risks taking a turn for the worse, with China’s zero COVID-19 policy constraining economic activity in the manufacturing and services sector.
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As Australia is inextricably tied to the current geopolitical tensions of the world, there are many prominent risks associated with this market. The Russian Ukraine war set the stage for record inflationary numbers across the world, with Australia’s CPI of 6.2% at its highest since 1990. With these numbers showing no signs of slowing down, continued rate hikes pressure consumer confidence, risking a housing downturn. Despite lowered signs of consumer confidence, labor force participation and unemployment rates are at record levels. The combination of a 50-year low of 3.5% unemployment and job vacancies trending up, places great pressure on businesses that are already struggling to find workers. Should this declining trend continue, Australia faces the risk of a labor shortage in the next few months.
RISKS
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INTRODUCTION
In comparison to Europe and the US reaching inflation levels of 8%, Japan’s CPI is only up 2.5% year over year in April. However, inflationary pressures are likely to surge in the coming months due to pent-up demand as covid restrictions are eased which will create demand-pull inflation.
The Japanese Economy is likely to face a number of economic issues in the coming year as a result of domestic and global forces.
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Additionally, weakness in the Yen is contributing to increased import prices which could present a potential challenge for the Japanese Economy in the near future. This inflation is outstripping gains in wage growth, which could catalyse the economic issue of subdued longer-term consumption.
Additionally, the Japanese economy has already experienced negative growth in the early part of the year with real GDP falling an annualised -0.5% in Q1. This has been influenced by the trade imbalance created by modest growth in Japan's nominal exports of 15.3% in Q1 compared to imports which were 32.3% higher than the year earlier. This has been caused by weakened Chinese demand for Japanese exports, Japan’s top export market, because of lockdowns and the struggling property sector.
Additionally, strong import growth was driven by successful vaccination campaigns, whereby medical product imports more than doubled on a year-ago basis in February in Japan. Although, it is worth noting that pent-up demand has already risen and is likely to propagate moderate GDP growth forecasted to be 1.7% in 2022, and 1.8% in 2023. However, economic growth in the US and Europe is slowing, with the risk of recession emerging, creating a risk for Japanese exporters as some of their major export markets reduce their demand.
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The Japanese Yen has been extremely volatile in the past months as it fell more than 6%, from 139.18 yen on July 14th to 130.40 yen on August the 2nd. This came after the surge in the currency by 21% between March and July.
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Furthermore, as a result of the Russian-Ukraine War, the disrupted supply chain led to greater levels of inflation worldwide. To combat this, global monetary policies saw a tightening trend, with a central focus and speculation on the U.S. monetary policy. So far, the U.S. Federal Reserve has raised short term rates from zero to 1.5% and expected to increase to 3.5% by the end of the year. However, Japan’s cash rate remains committed to monetary easing and keeps the interest rate at -0.1%. The widening gap of the cash rate has caused greater depreciation of the Japanese Yen.
FX
This volatility came about after the uncertainties of the Russian invasion on Ukraine, which inflated oil and other energy sources. Japan, as a net importer of oil, saw devastating impacts as Brent crude futures rose to $US140 a barrel. Japan's trade deficit for the first half of this year totaled nearly 8 trillion yen. This caused higher uncertainty for Japan and its currency, leading to larger depreciation of Yen.
The BoJ has reiterated its short-term interest rate of -0.1%, and its 10-year bond yield target of 0%, a global outlier compared to the hawkish central bank environment which has seen record amounts of monetary tightening in the face of high economic uncertainty and soaring inflation. The BoJ has kept its forward guidance on both short and long-term interest rates in a bid to combat economic uncertainty and encourage economic activity, and has continued its quantitative easing program through the purchasing of 10-year JGB bonds at Following0.25%.aglobal debt rally, foreign investors purchased a record amount of long-term Japanese bonds in July, net buyers of ¥5.06tn (US$37.4b), reversing a net sale of ¥4.1tn in June.
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FIXED INCOME
EQUITIES
However, upbeat corporate earnings reports have helped JPX to recover, with Nikkei share average closing up 0.87%. This is the highest it has been since June 9th, 2022. Sentiment on Friday was lifted by a rally in Taiwanese stocks, with the TAIEX index climbing 2.27%, and gains in U.S. stock futures, said a market participant at a domestic asset management firm.
The Japanese Stock Market is heavily influenced by the movements of Wall Street. As large company earnings are prepared to be released, there are great speculations on how inflation is impacting these businesses. Major indexes like S&P 500 fell 1.15% while Nasdaq Composite lost 2.26% as a result of these speculations. This impact is carried onto JPX, where the Nikkei 225 Index declined 1.77% and major technology stocks like SoftBank Group and Fanuc lost 4.28% and 4.54% respectively.
Japan’s largest commodity imports include crude petroleum ($72.3b), coal briquettes ($21.9 b), petroleum gas ($19.3b), refined petroleum ($16.5b) and copper ore ($9.19b). Japan is the 5th largest importer of goods in the world, and is the 2nd largest copper importer globally. As such, the JPX offers a robust market with ample opportunities for international organisations.
COMMODITIES
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“Japan’s largest commodity exports include refined petroleum ($9.76b), hot-rolled iron ($8.35b), Gold ($7.29b), flat-rolled steel ($4.79b) and refined copper ($4.13b). Japan is the 2nd largest iron and steel exporter, following China who dominates the market, exporting to over 190 different countries.
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RISKS
Following nearly a century of strong economic growth, the start of the 1990s marked the time when the asset bubble of Japan burst and the stock market, to this day, has not fully recovered. Prime Minister Shinzo Abe’s ‘Abenomics’ involved efforts to make exports more attractive and boost inflation by increasing government spending to stimulate demand and consumption, introducing structural reforms to make the country’s companies and labour force more competitive. However, Japan still maintains the highest national debt-to-GDP ratio in the world at 228% and a relatively stagnant GDP growth over the past decade, growing by an average of 1% a year since 2013.
WHY IS JP VULNERABLE?
Meanwhile, its demographics faces the risk of an ageing population with a ⅓ of its residents over 60 years old, with plummeting birth rates, the population is estimated to reduce by 25% by 2050 Many risks as a result of this include increasing the need for government spending health care, products and services, and pensions. The rapidly reducing workforce leads to decreasing capacity in the labour power (total number of eligible workers aged 15 and older) of the country as well as lower income tax yields in a stagnating middle class bracket. The workforce, which measured 65.77 million in 2013, is projected to drop 42% by 2060 to 37.95 million. Despite efforts by governments to fight population decline, boost fertility rate through decreasing employment hours and maternity leave reforms, it is unable to avoid a hyper-aged society with low birth rates and 30% of Japanese consumers over the age of 65.
Japanese stocks are often negatively viewed by investors due to concerns over trade tensions on the rise, especially with major powers US and China. Suffering from the USChina trade war, both countries take a total of 20% of Japan exports, Japanese companies have relied on China’s relatively cheap assembly lines, having moved away from being the intermediary of production pathways. BlackRock and UBS have both viewed the performance of Japanese equities as largely associated with updates in trade and geopolitical stability.
“This also explains the very gradual movement away from cash. In 2021, cashless payments only accounted for around 35% of private final consumption expenditure. Rather, businesses lost 1 trillion yen per year due to slower payment systems and less effective tax collection. This mentality is also largely prominent in corporations and their leaders who prefer to hoard cash and earn no return with interest, investing in employees, built upon the tenet of lifetime employment.
Japan faces the dilemma that a weak yen is bad for inflation but a strong one is undesirable for the stock market. The nation often welcomes a weaker currency as it makes exports more appealing, yet a hyper-inflation market in current economic climate, the cheaper currency makes imports more expensive. The BOJ has confronted the depreciation of its own currency with efforts to drive up stimulus aimed at keeping the 10-year JGB at its target.
The Bank of Japan (BOJ) does not establish a ‘target inflation rate’, instead a ‘price stability target’ which aims to keep prices of domestic goods and services stable/consistent. Further, the lack of specific schedule of BOJ announcements heightens short-term exchange rate volatility, with yen valuations dramatically changing.
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INTRODUCTION
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In Q2 of CY22, the Chinese economy experienced negative GDP growth for the first time since 2019. This decline surprised market expectations as it predicted -1.5% instead of the materialised -2.6% growth. Without a doubt the 2 month lockdown across the economic powerstation (Shanghai) has severely influenced this quarterly decline. Partial lockdowns in other Chinese cities including the capital (Beijing) and the tech hub (ShenZhen), have also placed downward pressure on household consumption, declining -3.5% in March, with consumer confidence plunging and remaining below pre-Covid levels.
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Further, due to the sustained lockdowns in Shanghai, it has prompted large uncertainty within the Shanghai Stock Market, causing large levels of capital flight from its foreign investors. China’s capital flows are seen to decrease significantly, amounting to a capital and financial account deficit of 892.4 USD in the first quarter of 2022, decreasing approximately 178.4% from the last quarter of 2021. Chinese stocks slumped 6% in April while the latest monthly flows data showed foreigners withdrew a net $17.5 billion from local shares and bonds in March. This caused further implications for currencies and government bonds, addressed later.
EQUITIES ASSET CLASSES
The Shanghai Stock Exchange has seen a 2.26% decrease in SSE Composite over the past week, indicating low performance within the stock market. However, on July 28th, the ChinaSwitzerland Stock Connect was launched. This allowed for SSE-listed companies to issue new shares on the SIX Swiss Exchange. The first 4 companies were able to successfully raise USD 1.6 billion from their investors through this corporation. The launch of this will catalyse sharing of market resources and potentially attract investors into the SSE market, assisting Chinese businesses to raise capital on the stock market.
Demand for metals will rise in general following COVID in 2019 and 2020. Furthermore, the general outlook for the manufacturing industry looks positive. However, the recent collapse of Evergrande signifies a slowing property market in China, which can potentially cap overall metal demand. Regardless, metals are very dependent on the Chinese government’s implementation of zero-covid policy and measures to boost steel-intensive activities such as housing
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COMMODITIES
It is also known that China is the biggest producer of rice (30% of global output). According to ITC Trademap, China’s exportation of rice reached approximately 1,196,781.0 metric ton in 2016, then subsequently increased to 2,304,487.0 metric ton in 2020. Due to the growing demand for fresh rice, the government is exporting its old stock at very low rates to Middle Eastern and African countries. Thus, the continuous high production of rice in the region is very likely to increase export quantity further.
Secondly,construction.China’s industrial sector accounted for two thirds of the country’s total consumption of energy, with manufacturing practices in particular utilising a large amount of coal. As of 2020, coal usage has reached 56.8% of China’s total energy use. Yet, China declared ahead of the 2021 UN Climate Change conference their intentions to bring non-fossil fuels in primary energy consumption to 25% and increase capacity of wind and solar power. This signifies growing attention towards renewable energy, thus reduction in demand for non-renewable sources such as coal.
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In lieu of China’s Covid Zero policy, the lockdown in Shanghai caused the city’s foreign currency trades to drop by 30% since March. According to the State Administration of Foreign Exchange, Beijing had the most currency deals in April, placing Shanghai as second among 35 other Chinese provinces and municipalities (see graph). As such, for the first time, Shanghai has lost its title as the top currency trading hub, casting profound impacts on Shanghai’s economy.
FOREIGN EXCHANGE
he delays in corporate foreign exchange demand potentially limited liquidity and therefore reduced trade volumes. However, a senior Chinese Strategist at ANZ, Zhaopeng Xing, reassures that despite the slower process of making foreign exchange purchases, the total amount of dividend payout stays relatively constant.
The published data reflected the impact of lockdowns on the Chinese economy. It has been found that bank settlement and sales reduced by 30% from March to $61.8 million, forming 15% of the national tally in comparison to the share of approximately 20% prior to the lockdown in 2019.
FIXED INCOME 25
Further, the onshore yuan in April was seen as the greatest monthly loss since China unified its exchange market 28 years ago. This was due the accelerated outflows from the Chinese national markets and an increasing monetary policy gap with the United States as a result of concerns regarding the strike of Covid. Consequently, the volume of daily average dollar-yuan trading in the market declined by around $5 billion from January to March.
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INTRODUCTION
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Hong Kong is known as an international financial hub, its economy is characterised by low tax rates, free trade and limited government interference. Its free enterprise system, which is independent of the communistic structure of China, means that the region has its own policies related to money, finance, trade, customs and foreign exchange. Hong Kong’s stock market attracts more overseas investors, as it has multiple advantages such as a registration based IPO system for faster and easier listing; greater international exposure for global expansion; stable financial infrastructure; effective regulatory framework
The Hong Kong handover turns 25 this year, reaching a critical halfway point, as Hong Kong will officially become a part of China in 2047 Following the mass unrest of Hong Kong’s protesters in July of 2019, 3 years on, the after-effects of the pro-democracy movement including a Beijing-imposed national security law and sweeping electoral changes have permanently reshaped the city. On June 30th 2022, President Xi Jinping took his first trip outside of mainland China since the pandemic to HK to participate in the ceremony to celebrate the anniversary. It is evident that Hong Kong and Beijing authorities no longer view democratic participation, fundamental freedoms, and independent media as part of this Thevision.
Russian-Ukraine conflict has increased volatility - outlook 2022: high volumes Slowdowns in IPO activity HK$331.4B raised (2021), existing good environment and pipeline support the system to maintain these volumes however, the volatility of the overall market and a fragile geopolitical environment have decreased interest and investor confidence.
However, as a special administrative region (SAR) of China, it is still ultimately influenced by the policies of the mainland. The impacts of these were clearly evident throughout the pandemic. Hong Kong employed its zero-covid strategy from the very beginning of the pandemic in 2020 and did well in taking preventative measures to prevent cases and Further,deaths.strict coronavirus-prevention rules of Beijing’s sustained “zero-covid” policy have been a source of uncertainty for the international business community. It has heavily damaged its travel and service-based economy. Nearly half of European companies are considering leaving Hong Kong this year, according to the local European Chamber of Commerce. The city’s unemployment rate from February to April hit a 12-month high of 5.4%, with the pandemic and sustained lockdowns as the main cause. However, Hong Kong recently announced that it will ease Covid hotel quarantine requirements for people arriving from overseas to 3 days only, with additional 4 days of ‘medical surveillance’ at home or any hotel with limited movement allowed. As the rest of the world opens up, the city's insistence on maintaining strict travel restrictions, which have put the economy under severe strain, has been increasingly criticised.
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The Hong Kong exchange is host to the same typical array of asset classes as we find in Australia, with equities, fixed income and derivatives dominating the majority share of the Hongmarket.Kong listed equities have had a rough year. Many of the similar trends of inflation, economic slowdown and general tough business conditions as we see in the USA and Australia have occured in Hong Kong, however this has been coupled with the rapid heighting of tensions between China and the Western world. This was amplified with the Russian invasion of Ukraine and the rapid and harsh reaction of the US, EU and ANZ regions, as China is an ally of Russia. Any connection between China and Russia in helping with the war would prompt a rapid withdrawal of funds, and a very sharp decrease in the market. In the three days following the Russian invasion of Ukraine, the Hang Seng fell approximately 20%. These significant withdrawals of Western funds have compounded economic issues alongside an economically restrictive covid-zero government policy in order to result in a -23% return for the Hang Seng index over the past 12 months. This compares to the ASX200, which returned -7% over this same time.
ASSET CLASSES
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Derivatives followed a similarly volatile period, given that over 90% of derivatives on the Hong Kong market are either equity index options or stock options. Although equity turnover volume has been significantly lower through 2022 as a result of the withdrawal of funds, derivate volumes have remained robust, with a relatively unchanged profile as compared to the start of After2021.the
collapse of major property developer Evergrande, the weakened property sector has led to a significant increase in the volatility and yield of most property-based Hong Kong listed bonds. Combined with the volatile inflation market, the government de-leveraging policy whilst trying to manage to not sink the country into a recession, and also maintain covid-zero, the fixed income space in general has seen considerable volatility in recent times. However, many market commentators now see many fixed income products as priced unrealistically bearish with relation to rate hikes and market risks, so despite the dire circumstances through 2021 and the start of 2022, there is potential for upside opportunity.
Economists forecast Hong Kong to fall into its second recession within three years, with predictions revealing Hong Kong’s economy could contract for the third time in four years. These bleak forecasts come as a result of Hong Kong’s strict adoption of Beijing’s ‘Zero-COVID’ regime, whilst a slump in trade, surging interest rates and imminent geopolitical tensions threaten economic growth, with Fitch Ratings Inc. revising its annual growth forecast to -0.5% in 2022 down from their early April forecast of 1.0%.
Hong Kong is one of the last in the world to still be enforcing strict COVID restrictions and regulations, most notably the enforced hotel quarantine for incoming travellers. Economists critique that such a stringent regime has resulted in the deterioration of Hong Kong’s status as a commercial hub whilst most certainly slowing economic activity, as locals and expatriates leave and cross-border travel to the mainland has been cut off, severely harming Hong Kong’s trade and overall growth. This prediction is only reinforced by the recent wave of COVID that significantly reduces the chances of the border reopening with China.
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RISKS
Early August saw a much-anticipated decision by the government to loosen mandatory quarantine requirements, from seven days quarantine to three, in hopes of restoring its status as an economic hub and improving the economy. Despite this ease in restrictions that will likely lighten the burden for international travellers, economists note that it will do very little to change the current foreboding forecast, indicating that the government would have to do much more to offset this risk and encourage the return of tourists and
Inbusinesses.additionto
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the COVID challenges, Hong Kong has had to grapple with rising interest rates. The US Federal Reserve has hiked interest rates several times this year to counteract inflation, forcing Hong Kong to follow the same to maintain the local dollar’s peg to the US dollar.
OVERVIEW
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Amidst a challenging backdrop of high inflation, rising interest rates, geopolitical conflicts and increased recession concerns, the NYSE has had an undeniably volatile start to the year, with the NYSE Composite Index being down -8.7% (as of the 8th of August). The NYSE is likely to continue to feel the weight of the Fed continuing to tighten monetary policy at an unprecedented pace, shrinking liquidity and slower overall growth; with the impact being more pronounced on speculative stocks.
This may be slightly offset by positive earnings season results, however markets are likely to remain volatile given that the US has technically entered a recession, shrinking an annualised -0.9% in Q2 and -1.6% in Q1.
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However, the Federal Reserve has pointed to strength in the labour market to suggest that the US is not in a recession. In July, the unemployment rate fell to 3.5%, the lowest level in 50 years. The number of unemployed persons fell to 5.7 million, returning to pre pandemic levels. Labour shortages remain as a key production constraint, and are thus likely to weigh in on Policymakersprices.
face tougher trade-offs between sustained growth and inflation in the short term. The pressure to live with inflation is likely to remain high on the Fed’s considerations as debt levels surged to fund the fiscal response to the pandemic and corporate and household debt servicing costs remain elevated after an era of low rates - creating higher sensitivity to rate increases. The Fed appears to be accepting lower growth to tame inflation (headline inflation is sitting at 9.1% as of June 2022) in the medium term. The market may be under-appreciating that price pressures are likely to persist, with high energy costs likely to be sticky as global commodity prices remain high. The energy index rose 7.5% in June, contributing to nearly half of the CPI’s rise. The contours of demand have also shifted from services to higher demand for goods, with personal consumer spending on goods (as a percentage of total nominal consumer spending) rising from approximately 31% in 2019 to 34.5% in 2022, though this remains below pandemic highs of almost 36%. Geopolitical tensions are likely to continue to weigh in on prices as global food and energy prices materially increase the cost of living in the US. Broadbased spikes in inflation are unlikely to have been priced in by markets, however the majority of the downside risk related to this macro-environment of persistently higher inflation and shorter economic cycles is likely to have been accounted for by portfolios.
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The United States is the largest exporter of agricultural commodities, valued at US$172 billion as of 2021. American agricultural commodities are dominated by corn and soybeans used as feed for the livestock industry, and the prices of both reached near record high earlier in the year amid supply concerns when Russia invaded Ukraine. In particular, benchmark soybean prices are up 75% since March 2020 as China rebuilds pig herds after African swine fever decimated its pork supply. However, we see recent falls in oil prices, a strong US dollar, hot and dry US weather and demand destruction amid a possible recession weighing on agricultural commodity prices over the next 6 months.
COMMODITIES
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“The United States remains the world’s top oil consumer and producer, with oil consumption increasing at the fastest pace since 1976 last year and oil production hitting a post pandemic high of 12.2 million BPD. The Russia-Ukraine war ravaged energy markets earlier in the year as West Texas Intermediate crude futures, the US oil benchmark, soared above $130 per barrel. While the price of oil has recently dropped below $100 per barrel on fears a possible recession could lead to demand destruction, the market remains historically tight and susceptible to geopolitical tensions. Notably, JP Morgan has warned that global oil prices could more than triple to a staggering $380 per barrel if Russia inflicts retaliatory crude-output cuts.
“With the US entering a technical recession, 10-year US treasury bonds have shown a steady decrease following a 10-year high of 3.4% yield in June. Volatility recent weeks reflects inflationary and expected jobs reports released in July, with wage growth earnings increasing over 5.2% over the last year - reversing falling 10-year yields from 2.5% to 2.8%. Despite the high treasury yields, investor sentiment continues to fall with analysts expecting further 75-basis point rate hikes in the coming Fed Despitemeetings.challenging
The combination of the US dollar a reserve currency and highinterest rates encourage foreign investors to seek a safe haven times of instability, driving up the US dollar. However, recent moves within the past month have shown the DXY (U.S. Dollar Index) retreating with markets focused July’s US CPI report.
geopolitical and inflationary environments, the dollar has stayed strong against major currencies, reaching a 20year high in mid-July on the Dollar.
FX AND FIXED INCOME
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RISKS
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As arguably the most influential market globally, there are a number of risks associated with the US economy, which is likely to have ramifications for other countries around the world. The CPI index hit a 41-year high of 9.1% in June. Should inflation continue on this trend in the July CPI report, this could trigger more aggressive than expected front-loading from the already hawkish Fed, which has flowon impacts both for the short-term in equity markets both in the US and globally, as well as implications for the economy With soaring inflation already placing downward pressure on household consumption and discretionary expenditure, higher mortgage servicing payments induced by increasing interest rates will only amplify this impact. With the US already in a ‘technical recession’ following two periods of negative GDP growth of -1.6% and -0.9% in Q1 and Q2 respectively, economists have been quick to point out that nonfarm payrolls data has been particularly strong, increasing by 528k, more than double the consensus number, with employment rebounding back to preCovid levels. However, the Fed’s current balance sheet run-off ‘quantitative tightening’ plan, through the sale of $2.2tn assets in the following three years, has the potential to equate to a 75 basis point increase in the Federal Funds Rate during periods of high economic uncertainty, and could result in over-tightening, sending the US economy over the tipping point into a full-blown recession.
To top this off, current US-China tensions have escalated further, with Nancy Pelosi’s recent visit to Taiwan sparking live military drills and firing of missiles, with already existing trade tariffs from the Trump administration which could worsen based on oncoming political events. This coupled with the current supply chain crisis, and food and energy inflation resultant of the Ukraine-Russia crisis, could also have the potential to increase imported inflation to a level unanticipated by the Fed and further increase recessionary risk.
The Toronto Stock Exchange in Q2 of 2022 reported revenue of $261.1 million, up 17% from Q1 2021. Growth was predominantly driven by the acquisition of voting control of BOX Holdings Group and AST Canada. Despite this, the adjusted diluted earnings per share ended at $1.88, down from $1.90 in Q2/21. This has largely been attributed to external factors, including increased volatility, higher interest rates and geopolitical events negatively impacting global capital market activity and having a flow on effect to the TSX and Canadian Economy as whole. Further to this, outlook for the final months of 2022 remains highly dependent on the Reserve Bank of Canada’s monetary policy cycle. There are fears that an over tightening of interest rates may prevent the economic ‘soft landing’ the Canadian economy requires from a record 8.1% rate of inflation in the year to July 2022.
INTRODUCTION
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Whilst the current market volatility has generated concern around the retirement plans of the Canadians, the three-year review of the long term sustainability of the pension plan conducted by the Chief Actuary confirmed the pension remains sustainable.
Canadian equities were named a safe haven for investors in the second half of 2022 by the National Bank as the natural resources provide a hedge against inflation. They suggested that the lower valuations and high exposure to natural resources in the Canadian equity market made it a ‘natural hedge’.
FIXED INCOME
ASSET CLASSES
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In fixed income, the recent interest increases have had a largely negative impact on Canada’s largest pension fund, Canada Pension Plan Investment Board, creating a negative 4.2% return in the first fiscal quarter of the year. The issues with global equity markets amidst accelerating inflation have weighed heavily on the fund’s corporate earnings and generated uncertain business and investment conditions. Thus, the fund’s five-year annualised net nominal return fell to 8.7% from the 10% in March.
EQUITIES
COMMODITIES
theory was plausible considering the cyclical nature of commodities which was also seen in the post-GFC supercycle crash. However, as Bart Melek, head of commodity markets strategy at TD securities suggests, forecasters in the commodities sector underestimated the willingness of central banks to hike interest rates to combat inflation.
America’s influence is further seen on the dollar’s attachment to the US, being named the second-best performer in the G10 in 2022.
FX
In terms of foreign exchange, two successive disappointing Canadian labour market data releases in combination with the pressure of the ongoing decline in oil prices may prompt the Bank of Canada to ease its interest rate hiking agenda. The BoC has had to be wary of the Fed’s interest rate policies to ensure the Canadian Dollar remains competitive with greenback.
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As a result of a sharp reversal of commodity prices of many of Canada’s key exports including copper, crude oil and wheat in July, investor enthusiasm in the resource sector has rapidly declined. Interestingly, commodity analysts and traders had previously suggested the theory of a new economic order blossoming that would power a supercycle similar to the post GFC Suchboom.
Thus, whilst historically Canada’s abundance of natural resources, central to its economic growth, had led investors to endure the peaks and troughs, the current reversing cycle led to a dampening of global growth expectations and hence low demand for its metals and energy.
the year amidst a commodity boom stemming from Russia’s invasion of Ukraine. As oil, mining and financial stocks make up over 60% of the Canadian index, the geopolitical tensions sent prices for commodities and natural resources soaring. However, as the energy price surges are fading amidst growing concerns of an economic slowdown, many investors have fled from the commodity-heavy TSX.
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investment officer at Purpose Investments, has noted “It’s great to see central banks finally waking up and trying to get ahead of this… but markets hate surprises and this caught a lot of people off guard.” Resultantly, banks and insurers drove the selloff as the S&P/TSX Financials Sector Index tumbled as much as 2.4%, the most in one month, before closing down 1.2%.
INTRODUCTION
England is currently facing a number of negative economic and political issues that will likely propagate low growth for the coming year. As of June 2022, headline inflation reached a 40 yearhigh of 9.4%, underpinned by high petrol prices which were up 18 pence per litre in June alone. This has also been impacted by the war in Ukraine, which has created issues throughout the UK of higher commodity prices and disrupted supply chains. However, the worrying issue for the UK is core inflation, which eliminates volatile price movements such as food and energy, as this reached 5.8% in June, well above the 2% inflation target outlined by the Bank of England. As such, Andrew Goodwin, the Chief UK Economist at Oxford Economics predicts the cash rate to reach 2.5% by November 2022, in order to combat this inflation. In turn, this will reduce households disposable incomes and thus minimise economic growth.
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Through the combination of these factors, the Bank of England predicts a recession for the last few months of 2022 with the potential to continue into 2023.
Additionally, the recent political uncertainty within the country following the resignation of Prime Minister Boris Johnson may negatively impact UK Business Investment. This has the potential to flow into UK financial markets, seen through higher long-term borrowing costs and increased volatility in UK bond, foreign exchange and stock markets with the potential to last 20 months. However, a proposed solution by the newly appointed chancellor of the exchequer, Nadhim Zahawi, is to remove the planned corporation tax increase from 19% to 25% to encourage business investment. However, the UK corporation tax is already 4 percentage points below that in other OECD countries and business investment growth is not very connected to corporate tax rates and therefore this will likely have minimal influence.
EQUITIES
Additionally,favourably.”
There is strong belief that the removal of the frugal Chancellor of Exchequer, Rishi Sunak, will see conservative party leaders seeking support from donors and party members to cut corporate taxes. This will hopefully give a strong boost to domestic shares, in need of a much-needed lift. Portfolio manager Alberto Tocchio even predicts that the “planned scrapping of the 25% corporation tax will see the UK domestic stocks respond
COMMODITIES
ASSET CLASSES
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the FTSE reaped the benefits of its 75% exposure to overseas revenue granting itself partial immunity to domestic volatility. However, the Britain midcap benchmark has slumped 20% in 2022 as Brexit further intensifies the country’s cost-ofliving crisis and a falling pound puts further strain upon companies.
Commodity linked companies within oil and mining have benefitted from an inherently strong degree of pricing power by being the primary producers The heavy weighting of miners in the LSE are also expected to enjoy a likely improvement in Chinese economic activity and higher interest rates Additionally, their limited exposure to emerging markets sees them receiving a tailwind from higher oil and gas prices
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Recession risk remains extremely high, with the Bank of England grimly forecasting a 15 month long recession and the largest drop in living standards in 60 years. With potential to hit 13% by Christmas, headline CPI remains a key risk in the UK market, and in a time of global economic uncertainty and soaring food price inflation, this could be a pertinent risk for a while. Should the geopolitical situation between Russia and Ukraine worsen this has significant impacts on soft commodity exports and could cause the price of these goods to skyrocket.
RISKS
With the UK still weathering the effects of Brexit, they remain more exposed to the Energy and Gas crisis than the Eurozone, with prices expected to rise by 75% in October, where prices have already tripled from a year prior. In a time where the UK runs dual risks of an inflation surge and a recession, the UK remains a bearish market in the near to mid-term.
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INTRODUCTION
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South Africa’s economic difficulties persevere as structural challenges in combination with low investment and economic disruptions create a depressive outlook for the close of Recent2022.devastating floods in the coastal province of KwaZulu-Natal in April 2022 has amounted to the massive destruction of key infrastructure including the country’s largest port in Durban. This hit on an already fragile economy has meant that the country has never returned to levels of economic growth of 5.6% pre-GFC in 2008.
Concerningly,increase.the
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High debt-servicing costs and expensive bailouts for state-backed companies have manifested into stagnant growth (treasury forecast of 2%), high unemployment (34.5%) and decreasing tax revenues. This largely stems from South Africa’s history of political corruption, in particular, the systematic looting under former president, Jacob Zuma, who spent more than R300bn ($18bn USD) on bails for SOE’s.
largest structural issue concerning the South African Economy is the current energy crisis. The rolling blackouts stem from the broken Eskom monopoly whose ageing coal plants result in power cuts for up to 12 hours a day, known as ‘load shedding’. The associated workers strikes have deepened the unemployment rate with estimates from chief economist, Isaiah Mhlanga at financial advisory firm Alexander Forbes, that the energy crisis could cost the economy R4.1bn ($250m USD) a day. The unstable political system forced the country to enlist the help of the private sector and decentralise the electricity grids by removing limits of power generation and increasing licence thresholds.
Forward looking, South Africa’s central bank has unveiled the biggest increase in interest rates in 20 years to tackle the surging global inflation dampening consumer confidence. The South African Reserve Bank raised its main benchmark by 75 basis points to 5.5% with the aim to stabilise inflation expectations amidst global turmoil with the Russia-Ukraine war.
However, higher commodity prices suggest that South Africa may be able to reduce its debt following surging prices for platinum and iron ore amidst Russia-Ukraine turmoil. This looks to provide much needed relief as South Africa was able to reduce annual borrowing in 2022 by R126bn ($8.13Bn USD) for the first time since 2015 as a result of the short term
A perennial challenge for JSE is remaining relevant and appealing as a capital raising destination. While JSE operating conditions have changed significantly over the last two years, disruption in the exchange environment is not new. The global peers face similar questions on responding to critical challenges. The JSE is concerned about the current delisting trend and slow listings environment. It should be noted that globally most initial public offerings have been technology stocks; South Africa’s operating environment appears not to be conducive to technology listings. As such, this raises the concern or rather the risk of entering domestic equities as a retail investor.
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The JSE’s market performance and outlook are inextricably linked to South Africa’s macroeconomic environment. We know that equities with high new listings activity typically have supportive economic growth and supportive policy. In South Africa, significant policy reforms and a step-change in economic growth remain the most potent tools to grow the market.
EQUITIES ASSET CLASSES
Foreign investors continued to be net sellers in the Equity Market, a trend that has persisted for a few years. South Africa’s reduced weighting in several global market indices influenced this trend, as did a weaker macro-economic outlook. Foreigners remained net sellers of equities, with R153 billion in outflows (2022: R128 billion).
There was a strong rebound in equity derivatives trading, fuelled by higher activity across the delta one products, primarily driven by index futures contracts. Overall, value traded increased by 7% to R5.8 trillion driven by greater activity across delta one products, primarily driven by index future contracts. The value traded growth was driven by a higher market capitalisation and the JSE Top 40 index increased by 23.3% in 2021. We saw a modest uptick in H2 in the options market while activity in international and exotic derivatives remained steady.
The number of currency derivatives contracts traded declined by 13%. The currency market activity remains subdued, primarily owing to a reduction in hedge-related activity.
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In the Commodity Market, the number of contracts traded was up 2% for the year, owing to higher volatility in global grains commodity prices. The year also saw the Commodity Derivatives Market reach an all-time high in the number of contracts traded (3 559 741 contracts), versus the previous record in 2019 (3 510 696 contracts). South Africa recorded an excellent harvest in the 2021/2022 season, in which higher crop prices and strong exports were maintained. The exceptional crops led to a substantial increase in physical deliveries through the Exchange (up 40% to 3.6 million tonnes).
COMMODITIES
In the Bond Market we have seen a 6% increase in nominal bond value traded. The increase in bond market volumes was largely attributed to tighter spreads and attractive South Africa real yields. The Repos Market, which is predominantly a funding market and a reflection of longer-term market sentiment, saw greater activity in 2022, with a 15% increase in nominal value traded YoY. The real yield on South African bonds remains attractive in the global context, with net inflows of R12.4 billion in 2021 compared with R15.2 billion in net outflows in settled trades last year.
BONDS
RISKS
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Consequently, with a decline in net foreign direct investment from $5.57bn USD in 2018, to $3.35bn USD in 2020. Similarly, the market capitalization of the JSE since 2018 has halved to $590m USD. This decline can also be seen through a record delisting of 24 companies in 2021, without recording a single IPO.
The JSE is faced with several significant risks, contributing to weak performance in the market over recent years. The JSE has been historically reliant on foreign investment which has declined over recent years due to exchange rate risk and political corruption. The national currency, the Rand, is tied to fluctuating commodity prices, with the mining industry accounting for 57% of the national economy. This is further exacerbated with local banks lacking enough liquidity, unable to provide long term financing facilities, resulting in overseas investors bearing the currency risk.
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The economy of Saudi Arabia has made a strong comeback from the COVID-19 pandemic, but remains as volatile and petroleum-dependent as ever. Growth is projected to reach 7% in 2022 as Saudi Arabia profits off increased demand for fuel by Western nations amidst the Russia-Ukraine war. Saudi Arabia, in not taking a side in the conflict as of August 2022, has been able to extract benefit from all parties involved, buying fuel from Russia while selling their petroleum to Western markets.
INTRODUCTION
As the Kingdom aims to grow its foreign investment, it has slowly opened up its debt and equity markets to foreigners. Its main stock exchange, the Tadawul, only opened to foreign investment in 2015, and just recently, in 2020, direct
Given the performance of the Saudi Arabian economy in its COVID recovery and the subsequent expectation of a capping of the Kingdom’s debt-to-GDP ratio by the end of the year, Standard and Poors has upgraded Saudi Arabia’s credit rating from stable to positive A-/A- 2.
Over the past decade or so, the Kingdom has made efforts to diversify its economy away from oil-dependency. In 2016, the Crown Prince announced Vision 2030, an ambitious plan for economic and social reforms with aims of transforming industry and creating new strategies for economic growth in the long-term. As of 2022, this has produced somewhat limited success targets for increased women’s participation have been achieved and SMEs have had their share of GDP grow significantly from 20% to 29% (2016-
Historically, the Tadawul offered a very limited and basic set of assets. Given the exchange’s young age after launching in 2007, equities, ETFs, mutual funds and Islamic bonds (Sukuk) were the only products offered.
ASSET CLASSES
Sukuk are a bond-like instrument, which operates with the issuer selling the buyer a certificate confirming the business is Shariacompliant, then uses the proceeds to purchase an asset that the investor group has direct partial ownership in. So instead of being an interest-bearing debt obligation like a bond, Sukuk involves direct asset ownership interest.
Income derived from sukuk cannot be speculative either, as this would make it no longer halal, and void the Sharia-compliant certificate. Definitely a very different world to Western
However,products!in2017,
the Tadawul signed a deal with Nasdaq to improve the exchange’s technology, and has now allowed it to offer more exotic product suites, including derivatives.
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In terms of asset class performance, nearly all Tadawul-listed products are positively correlated with the US market, due to the currency peg against the US dollar. However, due to the recent energy market crisis and large surge in oil prices, most of the Saudi market has outperformed over the past 12 months. The primary market index is up 13% over the past 12 months, as compared to the ASX200, which is down 7% in the same timeframe.
Bonds and sukuk listed on the market are down just 4.5% over this 12 month period, a marked improvement on the 9% which the S&P500 bond index is down over the same However,period.as we will see below, this outperformance does not come without significant risk, and evidently operates in a volatile and very different market to that of the Western world.
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When we break it down by the equity sector, we can see that the areas where Saudi Arabia focusses the majority of their economy are the sectors outperforming. Utilities are up 41%, banks 30% and most notably is tech, which is up 23%. This compares to the Nasdaq, the largest technology-majority exchange in the world, which is down approximately 13% over the past year.
Historically, Saudi Arabia’s Kingdom has presented notable macroeconomic and political risks that have sustained through the Covid pandemic. However, since the Kingdom opened its stock market to institutional foreign investors in 2015, various policies have been introduced to neutralise some of these risks.
As a result of the imbalanced structure of Saudi Arabia’s economy that lacks diversification away from its oil reserves, there are potential risks associated with investment. The country possesses the world’s second-largest proven oil reserves with hydrocarbons accounting for 33% of GDP and 70% of total export earnings. Thus, the narrow export base exposes the economy to volatile world oil price cycles. This was evidenced in 2020 during the decline of world oil prices leading to a 4.1% contraction of GDP. However, in its post-covid recovery, gradual easing of restrictive measures and the development of new transport networks and industrial sites suggests that the Saudi non-oil sectors, such as tourism, should benefit.
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RISKS
There are various concerns regarding the interaction between business and human rights in the Saudi economy. The historically rapid development of the Kingdom has resulted in a significant underrepresentation of Saudi nationals in the labour force with 76% of workers in the Kingdom being foreign in 2017 This poses significant risk for economic sustainability as high local unemployment has the potential to fuel increased militancy and aggression particularly amongst minority populations. However, the Saudi Arabian government's
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Legal protection in Saudi Arabia according to the Shariah law is slow, costly and holds great uncertainty for the concerned parties and particularly for international investors. This is largely because the courts are not bound by a system of precedent and instead, the Kingdom has discretion as to when to apply Shariah principles. This holds significant risk as the legal system may not properly protect investors from various contractual issues that may arise. This is evidenced in the commonality of late payments owed to American and British companies which, in
In the 2022 financial year, Euronext consolidated revenue and income increased to €1,298.7 million, up +46.9%, primarily resulting from (i) the consolidation of the Borsa Italiana Group, (ii) strong performance of non-volume related businesses and (iii) solid organic growth in clearing activities which offset lower trading volumes across all asset classes except fixed income, compared to a record year 2021. However, the ongoing price pressures sustained as a result of the Ukraine Conflict continue to plague investor confidence. This is compounded by worsening outlooks for an impending energy concern into the winter months of late 2022.
INTRODUCTION
1 59
To combat this, the European raise its interest rates with g however it faces the dilemma rates will aim to stabilise inflat required to boost the currently in the eurozone The only poten a possible surge in demand du may dampen the economic slo
On July 21st, the ECB raised all (for the first time since 201 expectations for a 25bp move response to the higher than exp FED decision in June to incr Monetary policy in the US still d stage than the European Cen comment however that this m timing as the window for such quickly, with risk the eurozone a recession by the ongoing conf
FOREIGN EXCHANGE ASSET CLASSES
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The euro exchange rate has be now at the same level as the $ The EUR/USD pair started off at rising to 1.1495 early Februar parity with the $US and belo standing at 1 021 (08/08) One losing value is the soaring i averaging 8 6%, with most re average inflation This is also prices due to the Russia Ukr countries in Europe rely on ga little alternative sources of ene the brink of cutting gas supply Germany, have sent gas price fears
EQUITIES
FIXED INCOME
More defensive sectors are stable and outperforming, given their traditionally lower level of earnings volatility into a recession The recent downward trend in bond yields should also encourage reinvestment into quality and growth stocks.
Europe equity markets continue to face a range of challenging factors, particularly with inflation, monetary policy and energy supply Despite outperforming global markets so far in the past as well as 2022, European equities continue to trade at a discount to global peers and stocks, adjusting to the new interest rate environment. A curtailment of Russia gas imports represented the biggest risk to European equities and the sharp fall in equities over the last few months suggests that investors are already anticipating a sizable pullback in European profits
Hesitance to borrow in the face of rising economic risks: with Europe’s bond market facing its worst ‘drought’ in 8 years This steep drop in borrowing reflects the uncertainties associated with rising interest rates, surging inflation and the fear of halting natural gas supplies from Russia In August, there were only 2 6 billion euros ($2 65 billion) of primary market deals in Europe, the lowest so far this year, and year to date volumes are down over 22% from 2021, the data shows.
The ECB will pump extra cash into struggling sovereign bonds, to protect regions such as Greece and Italy from surge in borrowing costs Buying bonds from Italy, Spain, Portugal and Greece with some of the proceeds it receives from maturing German, French and Dutch debt in a bid to cap spreads between their borrowing costs Notably, the current debt to GDP ratio of Greece and Italy respectively are 200% and 150% meaning that investors are at perpetual risk of panic over borrowing costs, especially amidst ECB announcements of halting bond purchases and raising interest rates The ability of government budgets to absorb higher interest rates is very low in some countries More hawkish monetary policy will therefore have a negative impact on employment and economic growth
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AGRICULTURE
[2021] The top 5 EU export products were machinery and equipment (12 9%), pharmaceutical products (10 7%), motor vehicles (10 3%) Germany is the top exporter in the EU, exports of €107 billion were 38 0 % of total EU machinery exports, €123 billion were 54 7% of total motor vehicle exports
Because of war related trade and production disruptions, the price of Brent crude oil is expected to average $100 a barrel in 2022, a 40% increase compared to 2021 Prices are expected to moderate to $92 in 2023 well above the five year average of $60 a barrel Natural gas prices (European) are expected to be twice as high in 2022 as they were in 2021, while coal prices are expected to be 80% higher, with both prices at all time highs
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ENERGY
Energy prices are expected to rise more than 50% in 2022 before only easing in 2023 and 2024. Non energy prices, including agriculture and metals are projected to increase almost 20% in 2022
Commodity prices are expected to remain well above the most recent 5 year average, where additional sanctions on Russia could raise prices even higher than currently projected 2022 has been largely difficult for the energy sector in Europe, in which the Russia Ukraine conflict revealed the vulnerability of the region’s reliance on energy imports and an unstable power infrastructure that has been overall, lagging in transition to renewables The EU relied on gas for around ¼ of its energy, with Russia supplying over a third of that supply in 2021
COMMODITIES
The increase in energy prices over the past two years has been the largest since the 1973 oil crisis Price increases for food commodities of which Russia and Ukraine are large producers and fertilisers, which rely on natural gas as a production input, have been the largest since 2008. Wheat prices are forecast to increase more than 40 percent, reaching an all time high in nominal terms this year. That will put pressure on developing economies that rely on wheat imports, especially from Russia and Ukraine. Metal prices are projected to increase by 16 percent in 2022 before easing in 2023 but will remain at elevated levels
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Certainly, the record high gas prices resulting from the Ukraine war has been a key player in slowing down supply chains and international markets, with benchmark prices increasing from €71 megawatt per hour in early February to €180 in mid July. In addition to the soaring inflation, the European Central Bank recently announced a hike in interest rates by 50 basis points, with even further increases expected for September, likely to be to a greater extent In doing so, the ECB intends to slow consumer demand by making money more expensive in hopes of stimulating the decrease of prices The European Commission further attributes the increasing prices to China's stringent zero COVID policy which has significantly delayed supply chains and slowed down international markets
Despite the high performing results attained by Euronext in its second quarter of 2022, partly due to the acquisition of the Borsa Italiana Group in the previous quarter, Euronext chief executive Stephane Boujnah cautions investors that they are in for a bumpy ride in the upcoming months.
Further, factors such as Europe’s soaring inflation, uncertain energy supply from Russia, and growing fears of recession have undeniably increased the pressure on the euro dollar, resulting in the fall of the euro to parity with the US dollar for the first time in 20 years as confidence falls and future economic prospects remain bleak.
RISKS
The current long standing market volatility and its long lasting effects are reflected in the latest economic forecast released by the European Commission which provides a pessimistic forecast for the future of EU markets Predictions elucidate rising prices in the eurozone, climbing up to an average of 7 6% in 2022, and a surging 8 3% for the whole EU 2023 is forecasted to experience a slight decline in inflation, yet still presents alarmingly high figures with 4% predicted in the eurozone and 4 6% in the bloc, doubling the European Central Bank’s (ECB) target of 2%
UNIVERSITY NETWORK FOR INVESTING AND TRADING FINANCE GUIDE UNIT 2022
