Volume 19 Issue 4 – May 2021

COMMENT AND OUTLOOK – Inflation Concerns There has been quite a bit of commentary recently on the prospect of rising inflation as the post pandemic economic recovery gains traction. This has caused some concerns as most parts of the developed world economy and specifically the USA, have experienced an extended period of disinflation as a result of the rate of inflation declining steadily over a number of years. The key concern about inflation is that it will lead to rising interest rates which in turn affect the bond markets that have benefitted from declining rates for many years. Another concern, particularly in the USA, is that the US 10 year Treasury Bond is the benchmark for interest rates that are charged on home loans and other forms of debt. A very large proportion of US homeowners are quite heavily indebted on their properties through their mortgages and the US property market is very buoyant as a result of these very low rates of interest. If that were to change it could lead to a reversal in the property market and have a negative knock on effect on wealth. The US Federal Reserve has said it wants to get inflation back to an average of 2% as limited inflation has a positive impact on economic growth. The challenge is that with inflation significantly below the desired 2% it will need to overshoot the 2% mark to between 3%-4% to settle at a sustainable 2% level. The US Federal Reserve is confident it can manage the increase in inflation without having to resort to using higher interest rates to curb any prospect of inflation rising above their desired target range. They are probably quite capable of managing this process but as they say, “when the genie is out of the bottle it is not so easy to get it back in again”. It is quite likely that inflation will pick up as a result of the supply chain bottlenecks caused by the pandemic-induced logistics disruptions in global shipping, transportation and manufacturing. There are also rising prices being seen in many commodities and this will add to input costs. As the COVID vaccine roll out becomes more widespread and economic activity continues to recover and supply chains normalise, it is quite likely that inflation will in fact settle at the US Federal Reserve’s targeted levels and inflation will not be a significant risk to economic activity and the markets. It must however be watched for any negative shifts that may suggest higher inflation could be a risk.

Global markets continued the positive trend they have been on for the past few months and US markets all improved in April. This was in part due to the announcement by President Joe Biden of 2 significant stimulus packages. The first is a 2 trillion USD infrastructure package which was followed by a 1.8 trillion USD family support plan, including students. These are significant amounts of money being injected into the US economy and will help with improving economic growth. The problem is that it increases US debt levels and widens the budget deficit. Markets in Europe were generally stronger as well during April, but economic growth lagged as a result of continued lockdowns and restrictions. Markets in the East were mixed with not much movement across the three main markets.

Commodities had a generally strong month with the oil price recovering the losses it had in March and rising to a level just below 70 USD per barrel. Gold also picked up during the month and iron ore, copper and platinum were all higher as well. The rand had a stronger month as well and recovered to well below R15 to the USD and also improved against the Pound and the Euro. The JSE had a marginally positive month led once again by the mining stocks with financials having a positive month as well as both bank shares and property stocks picked up. Property stocks have had a good recovery but are still significantly below where they were at the end of 2019. Consumer price inflation in South Africa increased slightly in April to 3.2% but is still at the bottom end of the SA Reserve Bank’s target range of 3% to 6%. The economic outlook for SA is improving as retail activity improves and the tailwinds of a resurgent mining sector and strong agricultural sector help fuel growth. Expectations for economic growth in 2021 have been raised slightly and growth of 3.5% is anticipated for the current year. South Africa’s trade surplus continues to widen as exports increase at a much faster rate than imports.

Also creating a more positive outlook for the country is the fact that the political stalemate within the ANC has been broken and after a frustrating 3 years, ANC and country President Cyril Ramaphosa, finally appears to be in control of the party he leads. The suspension of Secretary-General Ace Magashule is a significant step to have taken and can be read as further increase in support, within the party, of the renewal objectives of Ramaphosa. There is increasing evidence of people involved in corruption and other illegal activities being brought to account. Several former senior Eskom executives have had asset forfeiture orders served against them and the amounts involved are significant. The Zondo commission continues to hear evidence of just how compromised the state and key state owned enterprises were under the previous administration. SARS has collected more revenue in for the past fiscal year than was anticipated in Finance Minister Mboweni’s February Budget speech. So far, a third wave of the COVID pandemic does not appear to be a threat to the recovery underway but vigilance and awareness must be maintained so we do avoid it.

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