With Covid-19 there is concern about long-term vaccine efficacy and if the global population will require booster shots. The world is keeping a close eye on the UK. With high vaccination rates (70%) and an open economy, infection rates are high and they might have to shut down their economy again. In turn, this means many countries could face a shutdown at some point as well. So, Covid could be economically damaging for some time to come.

Commodity prices are up year-on-year, but there is concern due to a recent slow down, mainly due to slow down in growth and credit extension, particularly in China. It is expected to be short-lived.

Commodity producers have not ramped up production, so when there is a decrease in demand, it’s less likely that there will be a decline in commodity prices. The shift to the electrification in the drive chain (windmills etc) is metal intensive, so there will be a sustained, high demand for commodities for some time to come.

The third global theme is the Fed. Looking at growth, the US economy has exceeded pre-Covid levels and is expected to grow by 6% this year. The second consideration is inflation, with core inflation above 2%. Employment is still about 4% below pre-Covid levels, but expected to recover in nine months.

In nine months, the Fed could then consider putting the brakes on and potentially hike rates. The market only expects the Fed to hike rates in February 2023, so over the next six months, it will regularly recalibrate when the Fed is likely to hike rates. Therefore, there will be higher volatility for risk assets, including volatility for the rand and financial markets.

In SA, we have benefited from high commodity prices, with a trade surplus of R470 billion (8% of GDP) over 12 months. Some of the knock-on consequences is that export companies are paying more tax, so government revenue is up by R100 billion. The debate is then how to spend this? Reduced tax, more aid, or support consumers?

Investec expects SA’s growth to be 4.6% this year and next year, so we can be back at pre-Covid levels next year and not in 2023 as widely expected.

In terms of interest rates, the market view is that the SARB will hike the repo rate four times in 12 months. At Investec, we have a different view.

We expect inflation will be 5% over 12 months, GDP will recover next year and the rand is not under threat. So, we only predict one repo rate hike.

In summary, rates will likely pick up, the rand is trading at fair value and we should expect volatility in equity markets.