Volume 19 Issue 11 December 2021

Hope smiles from the threshold of the year to come, whispering, “it will be happier.” Alfred Lord Tennyson.

COMMENT AND OUTLOOK What can go wrong?

As the year draws to close, we reflect on the end of the second year of living with a global pandemic which is currently increasing its spread in its new mutated form. The Omicron variant of Covid-19 is rapidly increasing the levels of infection around the world. It was first identified by South Africa’s world class scientists and the immediate response by a number of developed world countries was to isolate South Africa and its neighbours through travel bans. This obviously has a severe impact on the country and many of its people and not just those inconvenienced through the travel restrictions. The tourism sector in South Africa was just starting to see an improvement with increasing numbers of visitors and has now been severely affected by the travels bans and the resultant large scale cancellations of booking by foreign visitors. It is now quite clear that the Omicron variant of Covid-19 is not a “South African variant” but quite possibly originated in some of the countries that have sought to isolate South Africa. The reality is that it is spreading rapidly in all parts of the world. In SA it is bringing on a fourth wave of covid infections as the number of infected people rapidly rises. At this stage the severity of the infections does not appear to be as bad as the previous waves, but it does seem that hospitalizations are largely attributable to people who have not been vaccinated. We have to hope that government does not resort to restrictive measures to curb the spread of the virus. The economy is still fragile and the ongoing electricity load shedding, high levels of unemployment and general consumer fatigue do not help improve things. Additional curbs and restrictions on movement and activity that negatively impact economic activity, must be avoided. Greater emphasis must be placed on getting more of the population vaccinated.

Global markets weakened during November as the impact of the US Federal Reserve’s decision to start cutting back on its asset purchase programme was weighed up. It also changed its stance on US inflation by saying that the current elevated levels of inflation may not be transitory. Their position to date has that the current spike in inflation will dissipate and inflation will return to the target level of 2% The reality is that core inflation in the US is now at the highest level that it has been for 30 years with no real signs of abating. Core inflation in the US is over 6% and is being pushed higher by a number of factors. There has been some relief from rising energy prices as the oil price fell during November and at one stage was below USD 70 per barrel which was a drop of over 15% Brent crude oil is currently trading at USD 74 per barrel which is still well below the USD 85 it was at during October. Natural Gas prices remain at high levels as supplies, particularly in Europe, are constrained. Large parts of Europe are experiencing a significant increase in Covid infection rates and restrictive measure are being introduced in a number of countries.

The South African equity market was one of the few markets that had a positive month in November. This was driven by an upward tick in the gold shares as well as some key stocks. The gold price fell during the second half of the month as the US Dollar strengthened on the back of the prospect of rising interest rates in the USA. The Rand also weakened quite considerably during November as a result of a stronger USD. It fell to R16.40 to the USD at one stage and has recovered a bit to its current level of under R16 per USD. The SA Reserve Bank increased interest rates for the first time in 2 years with a 0.25% increase in the Repo rate. This is a small increase but an important change in policy direction. While inflation remains within the Reserve Bank’s target range, there are some inflationary pressures being felt, particularly in producer price inflation. The South African trade surplus remains positive at just under R20 billion for October but that is a much lower level than was seen earlier in the year. Agricultural and mineral exports declined but there were also declines in some imports which kept the trade surplus at a reasonable level.

The global economy is recovering but the Covid pandemic is still affecting economic activity. Key issues in 2022 are the extent to which the pandemic subsides and economic activity normalizes as well as inflation and interest rates. If US inflation does become a bigger issue in 2022 then interest rates will have to be raised from their historically low levels and that has the potential to create some turmoil in global markets. Markets have got used to very low levels of interest rates and investors have switched emphasis to equity markets in search of better yields and returns and the additional risk assumed has been rewarded. It is quite conceivable that as the global economy normalizes markets could be volatile at times in the new year. China must also be carefully watched, as the slow down being experienced there could have repercussions in other parts of the world. In South Africa improved reliability from Eskom and better government are going to be key enablers. Question is will it happen? All the best for the festive season and 2022.


Twinoaks Investment Management (Pty) Ltd (Twinoaks) is an FSB approved Discretionary Financial Service Provider – No 849. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Twinoaks has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. For any further information concerning this publication, please contact Twinoaks.