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Risk off very evident in the markets

April 26, 2022by Nicholas Kabaso
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Local Market Commentary

  • China is once again at the heart of a new global supply chain crisis, with Beijing’s stringent covid containment measures expected to unleash another wave of chaos on supply chains between Asia, Europe and the US. This will have massive spillover effects for Africa. China’s covid zero policy amid a resurgence in covid infections has brought the pandemic full circle, just over two years after the outbreak upended the global economy.
  • The Shipping backlogs in China, together with the impact of the ongoing war in Ukraine, have come as a double-edged sword to global supply chains, inflation and global growth. According to shipping analysts, even if the covid outbreak in China is brought under control, the disruption will ripple globally and extend through the year as backed up cargo ships start sailing again.
  • Bloomberg data shows that China accounts for around 12 % of global trade. The stringent covid restriction has brought factories and warehouses in the world’s second-largest economy to a halt, slowed by truck deliveries and aggravated containers backlogs. In the near term, the shipping bottlenecks will mean costly delays in the  $22trn global merchandise sector, which has faced a troubled two years.
  • According to Flexport, a major US freight forwarder, it takes an average of 111 days for goods to reach a warehouse in the US from the moment they’re ready to leave an Asian factory, close to the record of 113 set in January and more than double the trip in 2019. The global supply chain issues are expected to keep inflation pressures elevated in the coming months and are dampening the growth outlook..
  • Moving over to mining, we had the President Hakainde Hichilema announcing yesterday that the government is very close to picking a buyer for Mopani Copper Mines. The government took on $1.5bn worth of debt to buy the mine from Glencore at the start of 2021, Glencore could not see the commercial value given the political backdrop at the time. It is well known that the mine requires substantial investment to increase its output, but given the new administration and tailwinds that copper is expected to experience in the coming decade this may well be a good investment at the right price.
  • One point to note, is that the President made it very clear that Zambia is not planning to hand Konkola Copper Mines back to Vendanta resources. The mine was seized in 2019 after which a provisional liquidator was appointed to manage it. “I have seen media allegations that we want to give KCM to Vedanta – those are falsehoods, that’s not true. We want to unlock KCM. It’s a Zambian asset and nothing should stand in the way so that the people of the Copperbelt and Zambia can benefit,” Hichilema said.
  • Through the tumult in global financial markets yesterday, the USD benefited handsomely and scaled the highest levels since Q1 2020, when lockdowns occurred. This marks approximately one year of the appreciative trend in the USD that shows no signs of abating. Although the USD is overbought, it is unclear what the catalyst for a reversal might be other than a major reversal in the rates market as the world starts to price out the Fed’s ability to hike as aggressively as it promised it would. The USD has tested 1.0700 support vs the EUR, while the GBP crashed down to 1.2750 overnight before stabilising. All eyes remain on U.S. earnings today and how stock markets respond to clues on risk appetite and the possible monetary policy scenarios that need to be priced in.
  • The local unit is expected to adopt a very measured approach to the open today given all the volatility we have seen of late. A stronger dollar will certainly play a leading role in the kwacha opening above the 17.00 mark this morning

Rand and International FX Commentary

  • Last week was one of the worst weeks for the ZAR since the lockdown, and this week has not begun much better. Despite the depreciation that was recorded last week, the ZAR remained on the defensive. Adding to the pressure of all that impacted the ZAR last week was also the rise in risk aversion this week as global stock markets sold off aggressively. The ZAR was one of several emerging market currencies yesterday that had a tough day. Whether or not the sell-off is sustained will determine the number of outcomes in the coming months, but the one thing it has secured is the need for the SARB to hike rates further to make any negative speculation against the ZAR more punitive to conduct.
  • Overnight, however, there was some good news that may see the ZAR’s slide stall. For all the negativity in global stock markets yesterday, Wall St bounced back and ended in the green. This morning, Asian stock markets have followed suit and will play a significant role in stabilising the ZAR. As it is, technical indicators overnight show that the ZAR has lost some of its underlying momentum, and more such behaviour may well be confirmed today.
  • Further good news in the form of a headline story on Business Day today suggesting that an ANC policy shift in favour of working more closely with the private sector should be cheered. The government has favoured state-led growth and control since it has taken power. It has been ruinous for the country, as previously proud institutions were systematically dismantled, and with no accountability, they became the targets for state capture. In a discussion document obtained by the Business Day to be tabled at a policy conference later in the year, greater inclusion of the private sector will now be debated. Given the failings of the past, it will be difficult for the communist/socialist factions within the ruling alliance to argue too strongly against shifting policy in this direction.
  • Whether the ANC has realised that it has run out of money and that it has limited options or this is a genuine ideological shift remains to be seen. However, greater inclusion of the private sector in this economy is a strong step in the right direction and something to be encouraged. It holds the potential to foster new skill sets, attract foreign direct investment, and domestic fixed investment, broaden the tax base, build a middle-class and regenerate much lost economic dynamism. It decentralises power and renders state capture more difficult to engineer, and will impose a higher degree of accountability as larger companies tend to be more accountable to shareholders. If investors were looking for something to cheer for this morning, this would be it. Fundamentally speaking, it would also help support the ZAR. Exporters are again urged to use the current opportunity to lock in some attractive forward rates as it remains far from clear that the ZAR appreciation phase is over

Nicholas Kabaso

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