US economic activity is now well ahead of pre-COVID levels despite strong headwinds from sharply waning fiscal stimulus, much higher consumer inflation and rising short-term interest rates. Consumer resilience is evident, stemming from robust labour markets, the buffer from accumulated savings from lockdown periods and higher wealth levels from high house prices and equity markets. Nevertheless, consumer confidence has been declining due to the above headwinds.
Europe’s economy, while performing reasonably, has been weakening at a time of higher inflation due to energy prices spiking and consumer confidence weakening. The war in Ukraine is impacting directly given its proximity to Europe, but also indirectly via the sanctions on Russia, raising energy and agricultural product prices.
In contrast, Chinese economic activity is recovering from a self-enforced slowdown because of targeted urban COVID-19 lockdowns, aided by increased fiscal and monetary stimulus. Property market activity is starting to benefit from some policy easing. Chinese government interventions in many areas of the economy – aligned with longer-term planning (and congruent with sustainably high longer-term growth) – are proving disruptive in the short term. These interventions are targeting more inclusive and less financially risky growth, increased corporate competition in industries where firms are particularly dominant, carbon emission reduction and technological independence.
Similarly, Japanese economic activity is recovering thanks to the complete lifting of COVID-19 restrictions and continued strong export activity.
The outlook for other emerging economies differs widely, with varied exposures to global supply chain bottlenecks, high energy and agricultural prices, strong mining commodity prices and a moribund tourism industry. Some poorer economies are facing extremely high food and energy inflation at present, which is already leading to much increased socio-economic instability risks.
Although South African economic growth has rebounded (slightly faster than expected), the local economy will likely continue to produce low expansion from here, despite continued strength in the primary sectors (mining and agriculture). South Africa continues to battle with excessively high unemployment and a large unskilled population, which increases social instability risks – particularly in the face of rising food and transport prices. Growth continues to be hampered by acutely unstable and inadequate electricity supply, underperformance of key transport infrastructure, weakened and revenue-hungry municipalities and chronically low business confidence. For these reasons, coupled with the very large government debt burden, we remain pessimistic regarding the structural growth rate for the local economy. Additionally, there is a risk that lower future commodity prices (particularly platinum group metals, iron ore and coal) will result in an even weaker outlook.
The automotive sector has experienced acute shortages of semiconductors and has therefore been unable to produce enough vehicles to meet the current consumer demand. This has negatively impacted auto catalyst PGM demand, together with reduced vehicle production in China attributable to their severe lockdowns. Semiconductor supply is normalizing higher, which should improve vehicle production to more normal levels over the next year, and China is now set to ramp up vehicle production in the months ahead. We retain a high exposure to Northam Platinum, that is expanding by adding low cost, mechanised production in a relatively high commodity price environment. We expect PGM prices to remain high in the near term and then to decline over the medium term. Northam is well positioned to operate profitably at significantly lower commodity prices given its high exposure to low-cost mines.
The Islamic Equity Fund was down 11.0% in the second quarter, underperforming the peer group average (down 9.1%). However, it is up 11.3% over the last three years, materially ahead of the peer group average (up 7.3% pa) and, since its inception in 2009, has returned 11.1% pa. Key positive contributors within local equities in the quarter included Datatec, Omnia, Adcorp and Mondi. MTN, Northam Platinum, Anglo Platinum and African Rainbow Minerals all detracted from performance. Global equity detractors included Siemens Energy, Dupont, Samsung Electronics, Micron Technology and Intel. Merck, Pfizer and Johnson & Johnson all contributed positively.
The Islamic Balanced Fund was down 7.1% in the second quarter, underperforming competitor funds (down 5.7% on average). However, it is up 10.7% over the last three years, materially ahead of the peer group average (up 6.5% pa) and has delivered 7.8% pa since its inception in 2011. A negative performance from our global and local equities was the key contributor in the quarter.
By: the Camissa Asset Management Team
Camissa Asset Management (Pty) Ltd is a licensed financial services provider
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