UK - LSE

7

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.

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.

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.

ASSET CLASSES

EQUITIES

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 favourably.”

Additionally, 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.

COMMODITIES

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.

FIXED INCOME

There are a variety of fixed-income products that the London Stock Exchange supports. Particularly, they offer efficient markets from vanilla bonds and local currency bonds to complex securitisation transactions for assetbacked securities. As a result, this fixed income listing market provides issuers with the flexibility to access a global investor base. Furthermore, the London Stock Exchange was the leading innovator in fixed income as it was the first exchange to globally introduce a segment for green finance, with over 230 active sustainable bonds that have raised c. £45bn in 17 currencies. Relating to current market conditions, the fixed income market has seen a greater influx as investors seek low volatility investments.

CRYPTOCURRENCY

Recently on 22 February 2022, the London Stock Exchange Group acquired TORA - a trading technology provider - for $325 million. TORA’s digital assets link to around 30 cryptocurrency exchanges, including Binance and Coinbase. As a result, the acquisition is expected to enhance LSEG’s position in the digital assets space, particularly as institutions increasingly seek cryptocurrencies and other digital assets.

RISKS

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.

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.

8

INTRODUCTION

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 2022.

Recent 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.

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.

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 increase.

Concerningly, the 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.

ASSET CLASSES

EQUITIES

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.

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.

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.

COMMODITIES

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.

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).

BONDS

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.

RISKS

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.

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.

9

INTRODUCTION

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.

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% (20162020), but the contributions of the oil industry to Saudi’s export revenues and GDP have not notably changed. While global demand, and prices, for oil remain high, Vision 2030 is unlikely to realise its diversification goals.

As the currencies of most Gulf economies are pegged to the US dollar, interest rates in the Gulf have been rising alongside the US Federal Reserve. However, inflation in the region, especially where fuel price-caps have been put in place like in Saudi Arabia, has been controlled significantly more successfully than in the US. With 2.3% inflation from June 2021-2022, inflation is on the rise, but the main pressure has come in the form of food prices. 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.

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 investment into debt instruments by foreigners was permitted. There are significant ongoing restrictions placed on foreign investors in the Saudi economy, which prevents anyone who is not a ‘qualified foreign investor’, a.k.a large financial institutions, from investing.

ASSET CLASSES

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.

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 products!

However, in 2017, 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.

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.

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. 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 period.

However, 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.

RISKS

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.

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 continued adoption of various strict policies regarding localised production, hiring quotas and regional initiatives suggest that this risk should diminish in the next few years. 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 practice, the Shariah law does not regulate. To remedy this specific instance, the Ministry of Finance launched the “Etimad” platform to sort financial claims in 2021, however no significant improvements have been noted.

Thus, considering these factors, Saudi Arabia has been ranked, on average, medium risk for enterprise investments.

1

INTRODUCTION

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.

ASSET CLASSES

FOREIGN EXCHANGE

The euro exchange rate has been falling for months and is now at the same level as the $US, continually depreciating. The EUR/USD pair started off at 1.1370 at the start of 2022, rising to 1.1495 early February and now falling to break parity with the $US and below $1 as of early July, now standing at 1.021 (08/08). One of the main reasons for its losing value is the soaring inflation in the Euro area, averaging 8.6%, with most regions experiencing aboveaverage inflation. This is also attributed to higher energy prices due to the Russia-Ukraine conflict, where many countries in Europe rely on gas supplies from Russia with little alternative sources of energy. Fears that Russia is on the brink of cutting gas supply to parts of Europe, including Germany, have sent gas prices higher, fueling recession fears.

To combat this, the European Central Bank (ECB) is set to raise its interest rates with goals to recover the euro, however it faces the dilemma that while higher interest rates will aim to stabilise inflation, a lower interest rate is required to boost the currently stagnating economic growth in the eurozone. The only potential upside of a weak euro is a possible surge in demand due to the exchange rate that may dampen the economic slowdown in some countries. On July 21st, the ECB raised all 3 key interest rates by 50bp (for the first time since 2011), also exceeding market expectations for a 25bp move. The larger increase was a response to the higher than expected inflation, following the FED decision in June to increase monetary tightening; Monetary policy in the US still drives the euro more at this stage than the European Central Bank does. Experts do comment however that this may have been the correct timing as the window for such a large rate hike is closely quickly, with risk the eurozone economy being pushed into a recession by the ongoing conflict nearby.

EQUITIES

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.

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.

FIXED INCOME

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.

COMMODITIES

AGRICULTURE

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.

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.

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.

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.

[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.

RISKS

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.

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%.

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.

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.