2020-Too (Let’s hope not!)
2022 is already one month down and the year has certainly got off to a fast start! Surviving the post-holiday blues is usually bad enough, but we’ve also had to endure record high temperatures (down in the Western Cape) and hearing about friends spending January in Hermanus or Kenton while they “ease back into the year. On the markets front, it has been equally tough to bear as uncertainty of inflation, fears of a looming equity bubble and Russian sightseeing tours of the Ukrainian border have meant there have been few dull days so far.
Being asked to give a forecast or predict trends for 2022 is always risky, with limited upside when you’re proven incorrect, so I will avoid doing that. However, I think we can safely say that the first half of the year (at least) should be dominated by the Federal Reserve’s (the Fed’s) decisions and tone around increasing US interest rates. Recent equity market turmoil probably hasn’t helped give any more certainty to the Fed’s balancing act, but you’d think they’d have to start with a hike sooner rather than later. Much of the predicted future is already priced into bond yields, but it is the uncertainty that always has the biggest ability to move the needle and send prices going in either direction away from what is currently expected. Let’s hope they act in line with market expectations. and at a reasonable pace. with no sudden shock reactions.
Locally, there is a strong consensus that the Monetary Policy Committee (MPC) will continue to increase interest rates after the recent 25bps adjustments in both November and January. There remain mixed feelings on exactly by how much and at what speed future hikes may unfold over the rest of the year. Interestingly enough, local inflation seems to be under control, with our Month-on-month and Year-on-year inflation figures for December 2021 coming in very close to market forecasts. Some of the main factors to look out for concerning South African inflation in the coming months include food and fuel prices. These two factors specifically led to average consumer inflation of 4.5% during 2021 (2020: 3.3%). Fuel prices have been volatile since the outbreak of the COVID-19 pandemic and could continue on this same trend if new variants of the virus are discovered. With inflation not necessarily the primary concern, the MPC will most likely be hiking interest rates as a reaction to any movements from the Fed. For this reason, there is an equal opportunity for some surprises on the local front, but, with what we can see in front of us at this stage, a cumulative 100bps still seems the most likely change over the coming year.
This apparent stabilisation in inflation has also meant that many local fund managers believe 2022 will be a year where nominal yields can outperform real yields. This should mean we see a slight rotation into some new sub-sectors of the bond market. Whether this also means that the market shifts back into more corporate debt will depend on both issuer demand and the credit risk premium required by funders for corporate debt. This premium the market is prepared to pay for the risk of corporate debt (also known as the credit risk premium) has been at relatively low levels for several years. The impact of the COVID pandemic did lead to a spike in spreads in mid-2020, but almost all sectors have seemingly returned to pre-COVID levels. This is most likely explained because in recent times there has been a dearth of quality assets. Issuers have not been expanding and growing in this economy and the need for debt has been subdued as a result. This lack of supply, with strong demand still coming from the banks (and others), has meant pricing, especially on the shorter end, could revert to pre-pandemic levels relatively quickly. Until corporate spreads start to widen, we don’t foresee a huge shift towards nominal corporate debt and anticipate that the bulk of the institutional funding will remain concentrated in bank and government debt.
If 2022 is a year of rotating in and out of opportunities, our Marketplace platform came to market at the perfect time. Launched in late 2021, it is already helping a host of asset managers, life insurers, and banks more easily negotiate and assess opportunities in the fixed income space. If you are still not yet aware of how Marketplace brings the market closer together and saves everyone time and costs, please reach out on the contact link below, and we will gladly set up a time. Our mission for 2022 is to make the Marketplace platform an indispensable infrastructure for the South African fixed-income market.
On the primary market front, we continue to see interest in unlisted debt instruments issued via our Platform as investors seek the protection of bilateral arrangements and issuers favour the lower cost of the unlisted instruments. The Debt Solutions primary platform has now helped place over R17bn into the local debt capital markets and our corporate issuer list has expanded to also include SOEs and banks in 2022. Debt Solutions remains a cost-effective fintech alternative to issuing listed debt but wants to remain at the forefront of market trends and will expand into being able to help issuers more easily navigate and facilitate ESG in 2022.
Ian Norden
Addendum Funding Solutions
