Investment returns from South African assets were subdued in May despite a continued upbeat global environment, as concerns over local growth and policy instability weighed on the market, and investors cautiously assessed the consequences of the sovereign credit rating downgrades. Foreign investor appetite for relatively attractive SA bond yields (and other emerging markets) supported continued strong inflows into the local bond market, also helping drive the rand stronger, but conversely, equity returns were dented by foreign outflows, the robust currency, and weakness in some commodity prices.
Internationally, news was broadly positive as the US and European economic expansions continued, while Chinese Q1 2017 GDP growth, was faster than expected. Markets are anticipating both further US interest rate hikes and ongoing monetary stimulus from the European Central Bank. The last round of France’s Presidential election resulted in a sound defeat of the anti-euro populist candidate in favour of the centrist, more conventional Emmanuel Macron. These developments helped push equity markets like the FTSE 100 and S&P 500 to fresh record highs. Global bonds also posted gains, continuing to reflect some doubts about the successful implementation of pro-growth policies in the US and the acceleration of growth in Europe and elsewhere.
Global equity market returns were generally strong in May: the MSCI World Free Index (for developed countries) returned 2.2%.
Meanwhile, the price of Brent crude oil fell again in May, losing 2.8% and remaining below US$50/barrel at month-end. Commodity prices were mixed during the month: gold was basically flat, tin and aluminium were among the gainers while losers included lead, nickel, and zinc.
In South Africa, some good news emerged when both S&P Global and Fitch refrained from further downgrading SA’s credit rating on 1 and 2 June. The latest inflation data also improved more than expected, as April CPI fell to 5.3% y/y from 6.6% y/y in March. At the same time, the SARB kept interest rates unchanged at its 25 May meeting, as widely expected, citing further possible credit rating downgrades, a deteriorating growth outlook and rand volatility as key risks going forward. The strongest investment performance in May came from bonds. The FTSE/JSE All Share Index returned -0.4% for the month, mainly due to weaker resources and financial stocks. Resources shares were the worst performers, followed by Financials, but Industrials and Listed Property had slight gains. The rand, meanwhile, gained another 1.5% against the US dollar due to foreign demand and dollar weakness, finishing the month at R13.18/USD, and also appreciated 1.7% against sterling amid UK election-based jitters. It depreciated 1.7% against the euro in May, however.
According to Morningstar data, the average ASISA SA general equity fund returned -0.8% for the month. The average multi-asset high equity (balanced) fund delivered -0.1%, while multi-asset low equity funds averaged 0.3%, and multi-asset income funds returned 0.7% on average.
Article by Pieter Hugo – Prudential Asset Managers