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Citation - First Quarter 2022



Citadel Chief Economist
Estimated reading time: 18 minutes 16 seconds read

Russian revolutionary, and founder of the Russian Communist Party (Bolsheviks), Vladimir Lenin once said, “There are decades where nothing happens and then there are weeks where decades happen.” His namesake and fellow Russian, Vladimir Putin, made Lenin’s point when he invaded Ukraine on the 24 February 2022. Where the start of the year saw the global economy recovering well from the pandemic of almost two-years – with economies rebounding to new highs, equity markets soaring, consumers spending recovering, and higher inflation considered a short-term hiccup – the first week of March saw the outlook for the global economy take on a completely different hue.

As the first quarter of the year drew to a close, the global economy suddenly faced soaring oil and commodity prices, which dramatically weakened the inflation outlook and impacted consumer confidence negatively, meaning that now, markets are far more volatile and the risk of a recession has almost doubled since the start of the year, should a resolution to the war not be at hand.



The Russian invasion of Ukraine is probably the biggest geopolitical and commodity side-show the world has seen in decades. On a global scale, we could probably compare this to the Cuban Missile crisis of 1962, the oil embargo in 1973, and the Gulf War of 1990, all events that negatively impacted global growth at the time, shaving more than 1% of potential growth.

Russia’s invasion of Ukraine had an immediate impact on the markets, and whether we will end 2022 in recessionary territory depends on where we are starting from. Fortunately, global growth is coming off a high base with expectations around 4% before the war, meaning that the economy is well-padded against an imminent threat of entering recessionary territory. In addition to commodity and geopolitical shock, the biggest concern to markets is the negative impact this war has had on consumer sentiment and confidence, especially across Europe and the United Kingdom. A sentiment that could easily spread to the United States. In times of uncertainty, consumers automatically spend less, and as their consumption falls, so too does GDP growth. Taking all these factors into account, the global growth outlook has declined to around 3%.

However, no matter what the outcome of this conflict is, we were always likely to see a decade of slower growth. There are a few reasons for this.

  1. The first is labour depopulation, as most major economies find themselves with aging populations, which will impact productivity and consumption.
  2. Deglobalisation has been cited by many commentators as a major headwind to global growth. But if you look at global trade, there is no sign of this yet. In fact, the supply and demand issues around global trade are still putting inflationary pressures on economies. However, as China battles another wave of COVID-19 and has locked down cities and major ports, many countries are looking to diversify their supply away from China. This, together with the disruption of the war, and sanctions against Russia impacting the supply of oil, gas and other commodities, there is an even greater incentive for countries to diversify their energy, commodity and food supplies – slowing the speed of globalisation.
  3. Finally, countries, post the pandemic, are now saddled with high levels of debt due to their accommodating monetary policies which were implemented to buoy economies, and increased financial aid to citizens. This should also weigh on growth going forward.


Another major theme for the rest of 2022 is sticky inflation and the policies central banks will adopt in response. In addition to the supply bottlenecks coming off the back of increased demand post the pandemic, with the invasion of Ukraine, supply concerns are arising around both mineral and agricultural commodities. Russia and Ukraine are major agricultural producers, responsible for more than a quarter of the world’s wheat production, a significant portion of global cooking oil supply, and they play a major role in fertiliser supply. With the implementation of sanctions, global food and commodity shortages are going to have a major impact on prices and result in higher and more sticky inflation.

Adding to inflation caused by increased demand and logistic and supply bottlenecks, China’s zero-COVID policy, which has seen the country lock down major cities and ports in an attempt to stem the spread of the virus, is causing additional pressure on supply. Indicative of Europe’s supply chain issues is Germany’s Producers Price Index, which is an indication of price pressure at the factory gate, is currently sitting at 25% year-on-year. This is its highest level in 73 years, which gives a strong indication of the inflation pressures that are building in Europe.

The biggest impact on inflation, however, is the rapid jump in oil and gas prices. Russia plays a major role in the global, and especially European, gas and oil supply. As energy prices are driven higher, this has a ripple effect on the cost of other commodities. Thus, global inflation is probably going to get worse (from already high levels) before it gets better. Peak inflation could reach double digits this year, with inflation only returning to central bank targets during the latter part of 2023.


With inflation here to stay, tighter central bank policies are a given. We are already seeing the United States (US) Federal Reserve (Fed) taking a more hawkish view on inflation and it has already started hiking interest rates and is looking to significantly tighten monetary policy in an attempt to keep record-high inflation numbers at bay. In upcoming months, we may start seeing the Fed hike interest rates more rapidly. Fortunately, US interest rates are coming off a very low base, so it will be some time before we see rates reaching the 2% to 3% level, which then starts to hurt consumers and companies. We are also fortunate to still have healthy GDP growth margins in developed economies.

While the European Union (EU) will likely follow a similar path to the US, European Central Bank (ECB) President, Christine Lagarde, believes that Europe’s challenge is supply inflation, which means that unlike for demand inflation, hiking rates may not be as effective. Europe needs to contend with challenges that include filling job vacancies and ensuring an adequate supply of oil and gas due to issues arising from the Russia-Ukraine war. Lagarde has stated that the ECB is going to take a cautious approach to interest rate hikes and has indicated that an imminent rate hike is unlikely.


When we assess the likelihood of a recession, we need to consider the consumer and their ability to spend. The first is to look at oil and gas prices as these has a knock-on effect throughout the economy. If oil remains at around $110 per barrel, then the economic outlook should remain intact. Should oil and gas move beyond $120 per barrel, this, together with supply issues, will put pressure on consumption, as it takes money out of every company’s and consumer’s pocket, and eats into consumers’ disposable income, which will result in a significant fall in consumption and fast-track a recession. However, should prices rise to around $130 or even $150, then a recession in Europe is very likely this year. If we look at the Citadel Recession Scorecard, which looks at around 10 economic fundamentals, we estimated in January that the likelihood of a recession stood at around 25%. Now, with the geopolitical developments over the past two months, this figure has jumped to more than 40%, meaning there has been a significant uptick in the risk of a recession. But as already mentioned, with capacity growth still expected, this will act as a cushion against the recessionary pressure of higher oil prices for now.

In this discussion the health of the US consumer cannot be overlooked. They are still the most important consumer, globally. As the US, it can be argued, is slightly ring-fenced from the war in Ukraine, they are in a good position. When we compare US consumer back in 2008, just after the Global Financial Crisis, which was caused by consumers who couldn’t service their debts, we are now seeing consumers who have learned from that experience and consumer debt, as a percentage of disposable income, is now at a decade low. This means that the impact from higher inflation and interest rates could be milder that otherwise, given consumers ability to maintain spending as there is still room to extend credit. As an example, the country’s mortgage delinquencies are almost at an all-time low and household savings are also elevated compared to pre-pandemic times. Those savings are in the pipeline and can support the US economy in these uncertain times. This should keep recessionary pressures at bay over the next year.


As developed Western economies are starting to tighten their monetary policy, China is moving in the opposite direction. Instead of monetary tightening, they are looking to ease monetary policy. In order to drive the consumption side of the economy, the People’s Bank of China, rather than driving infrastructure and exports, is now providing more liquidity through measures which include corporate tax cuts and economic stimulus, which should help them achieve their targeted growth trajectory through consumer consumption.

The country’s biggest challenge is their ongoing battle with COVID-19. High rates of infection are as a result of the use of the Chinese Vaccine, which is not very effective, especially against the Omicron variant. Their ongoing lockdowns are not only harming the economy but is also driving global inflation.


With monetary conditions getting tighter, especially with the Fed’s new hawkish view on the US’s inflationary environment, market volatility is also up and the environment for earnings now faces a lot of uncertainty. Having said that, the US business cycle remains quite healthy. Although there is has been some moderation in the business cycle, earnings should print positive for 2022, unless things deteriorate rapidly with the Russia-Ukraine war.

In Europe – including German, France, Italy and Spain – since 2008 corporate debt has declined, and the sector is looking healthy. US ratios have also fallen to much more favourable levels and are close to historic-lows. With the corporate sector not being over-indebted, corporates are going to have a buffer as central banks start raising interest rates to combat the current high inflation rates.

Healthy corporate savings will further aid equity markets, because even before Russia shocked the world with its invasion of Ukraine, markets were slowing, in dollar terms, at the start of the year. They were starting to price in the effects of potential increases to interest rates, and companies with a high debt to equity ratios were hurt substantially in the repricing of risk. Unfortunately, this trend continued into February and resulted in a very soft March. The risk markets were pricing in higher inflation rates, the tightening of central bank policies, and more recently, increased geopolitical risks.


Given these increased risk factors, we now need to ask ourselves, what is the likelihood of another global recession in the next 12 months? If we are expecting another recession, then as portfolio managers, we are going to have to consider how to de-risk our portfolios, because during recessions, companies make losses, which can result in bear markets. Fortunately, we believe the global economy is not there yet and that global growth is sufficiently high to ensure that companies should remain quite profitable. In addition, the Russian-Ukraine war has had a direct impact on inflation and made it stickier, meaning it is not going to just go away any time soon. This will impact central banks’ monetary policy decision.

Our view is that a recession is unlikely this year, but risks are mounting and as the weather clouds keep building we will continue to de-risk and protect our portfolios.


In the first quarter of 2022 we heard from Finance Minister, Enoch Godongwana in his first National Budget. But with Russia’s invasion of Ukraine happening the day after he delivered his budget, we have all but forgotten the Minister said, as the world’s attention turned the war in Europe. Yet, the local budget was neutral and a good balance between populous policies, which are much needed to keep people going and business friendly policies which will also help drive the economy. Both the National Budget and the State of the Nation address contained a common theme, that of economic growth. Both President Cyril Ramaphosa and Godongwana, acknowledged that a 2% growth rate is not sufficient to turn unemployment around and address the country’s infrastructure needs. Both also acknowledged that the country needs greater private sector participation, as soon as possible. This is highlighted by South Africa’s the fourth quarter 2021 GDP results which showed the country’s economy is the same size as it was in 2017. A concerning reality, because with record-high unemployment, if we want to prevent more unrest like that in July 2021, we need more than grants to support the country’s poor.

The GDP growth of 4.9% that came out for 2021 was a strong number, but that came off a very low base. While we were headed for stronger growth in 2022, when it comes to South African markets, what happens in the rest of the world has a direct impact on the local economy. The Russian invasion of Ukraine has now added additional challenges to our economy, and we will probably only achieve sub-2% levels for the next few years. Last year the economy experienced a number of tailwinds. Mining had one of its strongest years in recent times and was up almost 12% for the year. That did a lot to reduce the budget deficit as it added to the fiscus’s tax revenue. Agriculture was also up by around 8% and we saw good crop exports. This year however, with higher oil and gas prices, and higher fertiliser costs, the agricultural sector can expect a tougher time through to 2023. Export growth is also going to be impacted as the global economy starts to slow down, on the back of the war, high inflation, and monetary tightening.

On top of that, as South Africa’s economy opens up post-COVID, our imports are starting to increase which means the trade surplus that supported a stronger rand is going to fade, putting pressure on the local currency. Another headwind for the trade surplus is the price of oil, which is our biggest input item. Last year where we were paying an average of $50 per barrel, that price has now jumped to over $110 per barrel. This means that South Africa’s trade surplus is going to close quickly.

South Africa and the rand, however, are going to profit from the war, as a number of the commodities that have been sanctioned against Russia, are produced in South Africa. This is one of the reasons for the current exceptional strength of the rand. If you look at the rand versus its emerging market peer group, the emerging market risk-off sentiment should have caused the rand more pain, but we have actually found the currency fairly stable over the past month and despite the US hiking rates, which always strengthens the dollar. Over the last month, rand has been hovering below R15 to the dollar. So in the short- to medium-term, the South African economy is going to see some benefit from exporting commodities to the rest of the world, while Russia is out of the game. But given the price of oil, these gains may be offset by oil imports.

Unfortunately, despite the commodity boom, local infrastructure is taking strain and cannot deal with the added export load. In order to meet the demand for commodities, we need to be able to get commodities out of the country. However, our railroads and harbours are battling to manage the load and the recent floods in KwaZulu-Natal have only added to that burden. When it comes to maintaining and building infrastructure, our lack of action is reflected in the construction sector. Last year, construction came under pressure, and it declined 2% for the year. The sector remains under considerable strain, and as a major employer in the country, infrastructure development plans are critical to boost the sector and employment.

For the upcoming year, the outlook for South Africa, is that we can expect to see a slowdown in growth in 2022. As the necessary reforms and private sector participation will not happen overnight, the economy will not find itself in an environment for optimal growth for at least two or three years. It is for this reason, that it is so important that the current faction of the ANC gets a second term at the party’s National Elective Conference in December, because a win for Ramaphosa will pave the way for the policies which are in the pipeline to be implemented.

In addition to this challenging economic environment, South Africa also faces the same challenges the rest of the world is. Our inflation is on the high-end of the South African Reserve Bank’s (SARB’s) inflation target. Should we experience a supply shock through higher food and oil prices, as well as national energy agency, Nersa, giving Eskom permission to hike its prices, then we could see local inflation being elevated and exceeding the 6% SARB target. The SARB, however, is in a difficult position, as, although they would like to hike rates like the US does to combat sticky inflation, South Africa does not have a lot of demand driven inflation, and excessive rate hikes could hurt the consumer and ultimately the economy. So although our rates will go up, we do not think that SARB is in a rush to hike in line with the US.


As a team, Citadel Asset Management (CAM) meets on a daily basis. We assess the facts and debate whether we need to change our medium- to long-term view. We look at red flags like, oil prices and inflation, global economic growth, and the risk of future recessions.

So, how do we build portfolios in this very uncertain world? As we have mentioned many times in the past, it is about taking the emotion out of the process. We stick to our strategies that are designed to weather these periods of increased volatility. When we consider any investment we always consider our four investment pillars:

  1. The future is uncertain and will always surprise – this is not a new pillar; it has been part of our philosophy since the business was started in 1993. And it has never failed us. As such we always consider multiple scenarios, and make sure that there will always be an asset class that benefits should one of those scenarios play out. For example, we had gold in the portfolio las year, because we were concerned about negative real rates. However, last year, gold didn’t do well because there was a competitor in the alternative space, cryptocurrencies. However, when Russia invaded Ukraine, gold made a significant comeback as a safe-haven asset, supporting portfolio returns.
  2. Valuations make sense – don’t buy expensive assets. It is also tempting in an uncertain world to hide investments in cash or government bonds, but with inflation fast approaching double digits, those valuations do not make sense, as they will only guarantee that an investor will get poorer in real terms.
  3. Diversify, diversify, diversify – this is across countries, currencies, companies and asset classes. In times like this, being well diversified has served us well.
  4. Determine the right asset allocation – this pillar ties in with the financial plan that we design with our clients, because these plans drive the asset allocation in the portfolio in terms of cash, bonds, equity or alternatives. This strategy, of choosing asset classes, helps us to preserve wealth through various cycles, especially during volatile times. We always start by working out a cashflow budget with you, our client, that determines how much money you need for the next two years to pay for your normal monthly expenses. That money goes straight into cash. Even if the markets are under severe pressure and decline rapidly, you can sleep tight knowing that the cash you need is in the bank, and you will be able to pay your expenses. Then the money that you need in the next three to six years, is placed into a what we call shock absorbers, which may be alternatives or hedge funds. These are asset classes that are a little less correlated to the volatile equity growth assets, but where you are able to keep up with inflation. The remainder of your wealth, which is long term money, goes into growth assets. These are good local and global companies that have pricing power to beat inflation. If you look at these assets during economic crises, you may not sleep well, because they are volatile and typically do not perform well during times like we are experiencing now. So although markets may decline, over time they will rebound, and you will more than make up for the dips in the market. Here you have time on your side and given that you have catered for your cash needs you will never be in a situation to be a forced seller when markets are down.

Over the past three decades, sticking to this strategy of having cash in the bank together with our four investment pillars, Citadel has never experienced a permanent loss of capital for our clients. So although the pandemic, global economic volatility, and the potential for an ongoing war are all unsettling, we are confident that if we continue to manage our funds with the same process, we will deliver the same remarkable results as we have in the past.