17 June 2016
Equities and bond markets in developed regions such as the US, Europe and parts of Asia (Japan) provided investors with gains despite the widespread speculation regarding the next US interest rate hike. US equities rose for the month of May, with the tech-heavy NASDAQ leading the gains, advancing by 3.62% against a backdrop of improving macroeconomic data. The improving data, which included an upgrade to first quarter GDP growth to 0.8% from 0.5%, allayed fears about the durability of US growth. The Eurozone posted steady gains for the month, led by the German DAX, which advanced 2.53%. However, GDP growth for the Eurozone in Q1 2016 was revised downward to 0.5% compared to a preliminary estimate of 0.6%. The month of May also saw the price of Brent crude oil breach $50 per barrel, a significant psychological benchmark price, which saw other important commodity prices rise concurrently.
Locally, the annual inflation increase in April was slightly lower than market expectations (coming in at 6.2% y/y instead of 6.3%). Despite this, the outlook for the second half of 2016 still remains bleak as rising food prices and water and electricity tariffs still threaten to push inflation up to an estimated 8% by the end of the year. In contrast to market expectations of a rise in producer price inflation to 7.3% y/y in April from 7.1% y/y, the actual outcome showed that the rate moderated slightly to 7.0% y/y. The rand, depreciated considerably against the US Dollar in May and is down 1.51% year to date as at the end of May 2016.
South Africa’s annual headline inflation rose by 6.2% y/y in April, slowing from 6.3% in March 2016. Inflation came in slightly lower than market expectations, as a slowdown in petrol prices offset substantially higher food prices. Annual core inflation which excludes the cost of food, non-alcoholic beverages, petrol and energy was at 5.5%, slightly up from 5.4% in the previous month. On a monthly basis, consumer prices rose by 0.8%, at a similar pace as in March, with upward pressure coming from transport prices which rose to 2.7% from -0.8% in the previous month. Food and non-alcoholic beverages went up 1.9% from 1.6% in March and housing and utilities edged up 0.1% (+0.8% in March).
The South African Reserve Bank kept its benchmark repo rate on hold at 7% at the 19th policy meeting in May, in line with expectations. Policymakers announced that there is some room to pause the tightening cycle with the previous hike improving the inflation expectation, while the growth outlook continues to worsen.
South Africa recorded a modest R0.43 billion trade surplus in April compared to the R2.03 billion surplus in the previous month. This was mainly driven by exports which declined by R3.02 billion (3.2%) due to lower shipments of chemicals products (-13%), precious metals and stones (-10%), base metals (-6%) and mineral products (-3%). In contrast, vehicles and transport equipment exports rose 9%. South African major export destinations were China (8.7%), Germany (7.6%), the US (7.6%) and Namibia (5.1%). Imports dropped by 1.5% to R91.2 billion from R93.2 billion in the previous month, with purchases of vegetable products (-34%), optical photographic products (-10%), plastics and rubber (-6%) and mineral products (-3%) decreasing. The main sources of imports were China (17.3%), Germany (12.4%), the US (7.3%), Japan (3.7%) and India (3.3%).
Locally, the ALSI gained 1.84% in rand terms but shed -7.79% in USD, with only the SA Industrial Index providing notable gains (5.11%). By market-cap, the Top 40 gained 3.27%, whereas Mid and Small caps declined 5.69% and 3.56% respectively. Consumer services (+10.59%) was the top performing industry followed by consumer goods (+6.78%). Telecommunications (-13.74%) was the worst performing industry followed by basic materials (-3.81%). The Gold Mining sub-sector shed 10.72% in May, down from +5.42% in April, with major miners Anglo American Plc (-11.87%), Anglo American Platinum (-14.55%) and AngloGold Ashanti (-7.04%) all suffering losses. Rand-hedge stocks in the Top 40 showed resilience in the market. Naspers (+18.35%), SABMiller (+12.78%), Mondi Plc (+12.70%) and British American Tab Plc (+11.28%) were the best performing large-cap stocks, while MTN Group (-17.82%), Anglo American Plat Ltd (-14.55%) and Anglo American Plc (-11.87%) led the losses in the large-caps. The financial index dropped 1.98% and was mainly dragged down by major life insurers and banks in the Top 40 index, namely, Sanlam Ltd (-9.81%), FirstRand Ltd (-7.10%) and Standard Bank Group Ltd (-2.90%). Foreigners were net buyers of R4.7 billion worth of equities in May and net sellers of R38.2 billion YTD.
Local fixed income markets saw the ALBI (-1.47%) underperform inflation linked bonds (-0.80%) as well as cash (+0.61%). Preference shares fared no better, shedding 0.27% for the month. The shorter end of the yield curve (1-3yrs) was the best performing asset class on the yield curve, returning 0.33%, followed by 3-7yr bonds (-0.64%). The longer end of the yield curve (12Yrs+) was the worst performer, returning -2.01%. SA listed property (a hybrid asset class) dropped -3.47% in May. For the month, foreigners were net sellers of R12 billion worth of bonds and net buyers of R12.6 billion YTD. In the month of May, the rand came under severe strain as it weakened significantly against the US dollar (+10.44%), the euro (+7.28%) and the pound sterling (+10.62%). It also weakened against the yen (+6.05%).
The month of May saw a continuation of the risk-on sentiment seen in April, with the price of oil leading commodities higher and developed equity markets rising. The patterns of returns year-to-date have been interesting and mixed: commodities have bounced back; government yields have fallen as inflation expectations have declined and central banks have expanded their efforts to support economic growth.
In rand terms, emerging market equities (+6.14%) underperformed global developed market equities (+10.69%) in May, as the rand depreciated by 10.44% against the US Dollar. The MSCI Developed World Index gained 0.23% in USD, while the MSCI Emerging Markets Index lost 3.90% in USD over the month. Developed market property returned -0.31% in USD whereas bonds lost 1.34% in USD. Looking at developed markets, all the indices yielded positive returns in ZAR due to the rand depreciation, where the Nasdaq (+14.44%), the S&P 500 (+12.14%), the Dow Jones (+10.53%), and the FTSE 100 (+10.43%) were the top performers for the month. In emerging markets, China’s Shanghai Composite index declined 0.74% in its base currency and gained 7.79% in ZAR. The US dollar strengthened against the euro (-2.76%) and the British pound (-0.79%).
Global developed market equities (+0.23% in USD and +10.69% in ZAR) outperformed emerging market equities (-3.90% in USD and +6.14% in ZAR) in May 2016. Developed market property lost 0.31% in USD and gained 10.10% in ZAR. Meanwhile, global bonds shed 1.34% in USD and gained 8.96% in ZAR, underperforming their equity counterpart. Locally, the ALSI gained 1.84% (-7.79% in USD) largely on the back of SA Industrials (+5.11%). Industrials (excluding dual-listed companies) increased by 0.03%, resources lost 3.81% (compared to its sterling performance in April +13.4%), while financials declined by 1.98% in May. The shorter end of the yield curve (1-3yrs) was the best performing asset class on the yield curve returning 0.33%, followed by 3-7yr bonds (-0.64%). The longer end of the yield curve (12Yrs+) was the worst performer, returning -2.01%. Cash was the best performing fixed interest asset class returning 0.61%. SA listed property delivered a negative return of 3.47% in May, a significant decrease when compared to the 1.95% return in April 2016.