The effects of COVID-19 on the economy and markets for more than a year has dominated news headlines with the second quarter being no different. The developed market’s skew of vaccine availability, new variants, and varied responses from authorities are among the key themes globally that once again stood out this quarter.
All eyes also shifted towards the US Federal Reserve, given the sharp rise in US inflation, which some feared might prompt policy tightening, potentially pouring cold water on the equity market rally. Given the rise in prominence of cryptocurrencies, many will also have noted their sharp declines during the quarter, amid mounting regulatory scrutiny. Back home there was an air of slightly improved confidence, until the third wave spike in cases necessitated Level 4 lockdown restrictions, while former President Jacob Zuma was handed a 15-month jail term for contempt of court.
Tell us about the economic backdrop
The global economy is rebounding at a brisk pace following last year’s contraction. Both the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD) have revised their growth estimates higher, and are expecting strong growth for this year, moderating slightly next year. This backdrop is positive for growth assets, which have risen sharply in anticipation, prompted by the stimulative policy backdrop and vaccine programmes. Developed markets have been swift to roll out the vaccine, while developing economies have made slower progress, during a time where novel strains of the virus have emerged. Although new strains of the virus remain a risk, they are unlikely to affect global growth as materially as before, given the better levels of preparedness. As such, we could expect reduced support from policymakers over time, on both the fiscal and monetary front, with the US Fed expected to begin scaling back certain measures and even hiking rates as early as 2022.
Growth in South Africa is following a similar pattern to other countries, with a strong post-recession rebound underway. However, the concern is that the pace of growth is likely to revert to its historic subdued level. South Africa’s economic progress has disappointed for so long that prevailing low expectations are justified, while the risk of successive COVID-19 waves is also high given the low vaccination numbers. Nevertheless, there are a few encouraging signs that keep us from being excessively pessimistic at the moment. Notwithstanding our level of growth, corruption, or indebtedness, for example, it is the direction of incremental change which piques our interest. Further momentum in political and economic reform could lead to more positive surprises, of which consensus is not fully appreciative. For now, however, we maintain our wait-and-see approach, on whether the mining sector’s prosperity filters through to the rest of the economy, and for further evidence of a more constructive political environment.