MARKET OVERVIEW – MAY 2019

MARKET OVERVIEW – MAY 2019

Global equity markets suffered a broad-based downturn in May following a new bout of tariff increases in the US-China trade war, exacerbated by growing concerns over the impact it will have on global growth. In the UK, Prime Minister Theresa May’s failure to successfully negotiate Brexit led to her forced resignation. Meanwhile, signs of an economic slowdown worsened in Germany, the EU’s largest economy, and in China. Amid the rise in risk-off investor sentiment, equities sold off sharply in favour of safe-haven assets, with the MSCI World Index returning -5.7% and the MSCI Emerging Markets Index delivering -7.2% (in US$).

In South Africa, the ANC won the country’s national elections, with investors largely confident in Cyril Ramaphosa’s commitment to curtailing corruption and pursuing difficult economic reforms.

In the US, President Trump increased tariffs on $200 billion of Chinese imports from 10% to 25%, and threatened to extend tariffs to another $300 billion of goods, after accusing China of backing out of a deal that would have ended the trade dispute. In a move that many believe could become a prolonged technology cold war, the US blacklisted Chinese telecoms giant Huawei over concerns that the company posed a risk to national security. Tensions between the two nations were further amplified after the US military sent two navy ships through the Taiwan Strait. The US also threatened to impose tariffs on Mexico if it failed to reduce the numbers of migrants entering US borders. In more positive news, the US agreed to lift tariffs on steel and aluminium imports from Canada and Mexico, effectively removing a major obstacle to the approval of the new North American Free Trade Agreement.

US markets are now pricing in the likelihood that the US Federal Reserve will implement rate cuts far sooner and to a much greater extent than previously expected.

In the UK, Prime Minister Theresa May was forced to resign (by June 7) after failing to deliver Brexit. The decision amplified doubts over the Britain’s resolve to leave the EU, while setting up a Conservative party contest for a new prime minister.

European shares slid on the back of news that China would reduce its supply of rare earth elements to the US, which are crucial to a number of industries. Investors also had to contend with rising political tensions between Italy and the EU, amid looming fears that the political fight over debt levels could trigger a debt and banking crisis in Italy. German unemployment rose for the first time in nearly two years, while German banking authorities announced that the country’s banks would need to set aside additional reserves from July to cover risks stemming from an inflated domestic property market and a slowing economy.

In response to the US imposing increased tariffs on Chinese goods, the Chinese government struck back by raising tariffs on a revised list of $60 billion on US goods with effect from 1 June. Chinese buyers halted purchases of American soybeans, and the Chinese government threatened to cut its supply of rare earth elements to the US, which (amongst others) are essential components in military equipment, such as aircraft engines, missile guidance systems, defence systems, satellites and lasers.

In South Africa the ANC won the national elections with a majority vote of 57.5%, boosting investor confidence that Cyril Ramaphosa would be able to pursue a course to curb corruption and implement difficult economic reforms. Following his pre-election pledge to reform the country’s economy and attract foreign investors, Ramaphosa announced a smaller and well-balanced cabinet, a move that was well received by markets and helped the rand pull back from a five-month low.

The SARB kept its benchmark repo rate unchanged at 6.75%, however lowered its 2019 growth forecast from 1.3% to 1.0%. The market is now expecting the SARB to cut interest rates as soon as its next meeting in July.

The FTSE/JSE All Share Index returned – 4.8%. According to Morningstar data, the average balanced fund delivering -3.2% while the average low-equity balanced fund produced -1.1%.

Adapted article by Prudential Investment Managers

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