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GTC Q2 2021 June

Global Inflation – 2nd Quarter June 2021

Inflation is the continuous increase in prices over time. This represents the increase in the price of goods and services offered by a country. As inflation increases it conversely erodes the purchasing power of a country’s currency. There are generally two types of inflation, cost-push and demand-pull inflation. Cost-push inflation (decrease in aggregate supply) can occur from shortage of supply or due to increase in production cost (i.e. increase in wages or energy). Demand-pull inflation (increase in aggregate demand) is the result of increase in overall demand which can be generated from an increase in money supply or government spending among other drivers. Current global inflation is as a direct consequence of both cost-push and demand-pull inflation.

US Interest Rates – 2nd Quarter June 2021

The US FED kept interest rates unchanged over the quarter while continuing its asset purchase program in its efforts to provide more liquidity to the market. Over the quarter investors reacted negatively as US inflation increased to 5%. Notwithstanding this reaction, the FED maintained that US inflation is transitory, and that short-term elevated levels are expected given the low base and release of pent-up demand as the global economy reopens.

Dollar – 2nd Quarter June 2021

The weaker dollar and relatively lower US interest rates remained supportive of a stronger rand over the quarter. Towards the end of June however, the rand lost some ground after the FED indicated they may hike rates in 2023 which would be sooner than previously announced. This is graphically depicted in the chart below: Over the longer term and on a simplistic basis, the South African rand seem to be close to fair value relative to the US dollar as indicated below:  

Local Property Market – 2nd Quarter June 2021

The quarter saw no change in the local repo rate, remaining at an all-time low of 3.5%. However, local market jitters over future potential rate hikes have emerged once again, as investors remain concerned about global inflation and the unexpectedly hawkish move by the US FED. The local favourable interest rate environment has been a boon for the local property sector, aiding it in its recovery from previous lows. However, the sector is still severely depressed as evidenced by its negative medium-term returns (-8.9% annualised over 3 years to June). The property sector faces a systemic shift in demand amid rising online sales activity and as more companies permanently adopt the work from home-based approach. As demand requirements for the post pandemic world unfolds, so will the outlook for the property sector.

Global and Local Markets – 2nd Quarter June 2021

Developed markets equities outperformed both the global emerging market equities and the South African equity market over the recent quarter. Within developed markets, US stocks gained the most followed by Europe, UK and Hong Kong with slightly negative returns from Japanese equities. Strong vaccination programmes have aided in the upward trajectory of developed markets over the quarter. Going forward, investors will keep a keen eye on the spread of the delta variant and its potential economic ramifications. On the local front, the surge in the Delta variant related Covid cases has resulted in stricter lockdown measures being imposed to contain the spread of the virus. While needed to reduce the mortality rate, it comes at great cost to the already fragile South African economy. In the local market, resources pulled back sharply over the quarter, while financials and industrials were...
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