Market Overview – May 2018

Market Overview – May 2018

In May, financial markets were generally driven by a strengthening dollar, rising global bond yields and increasing concerns over a global trade war, all of which weighed on world equity markets and on emerging markets in particular, including South Africa. A rising oil price also fed the more cautious investor sentiment. In South Africa, most asset classes delivered negative returns, while higher inflation and a weaker rand weighed on sentiment.

Strong US data, including robust retail sales and factory data, fuelled expectations of a faster pace of Federal Reserve interest rate hikes for the year. This came even as the Fed left rates unchanged at its 2 May meeting. The positive impact of Trump’s tax cuts is expected to feed into the economy in the coming months.  And on 31 May, President Trump announced 25% tariffs on aluminium and steel imports to the US from Canada, Mexico and the EU, which were greeted with dismay and threats of retaliation from the affected countries.

Elsewhere, Italy’s political crisis – in which two anti-establishment parties garnered the most electoral support – sparked weakness in European bonds and the euro. Eurozone economists still expect Europe to continue to expand strongly this year. In China, some analysts are forecasting a slowdown in 2018, below the government’s targeted 6.5% GDP growth rate, as a result of the crackdown in corporate lending activity.

In South Africa, a weaker rand, rising oil price and tax increases fed through to higher inflation, again denting growth prospects for the country. CPI inflation jumped to 4.5% in April. Taking note of this, of rising US interest rates and the weaker currency, the SA Reserve Bank (SARB) kept interest rates on hold at its 23-24 May meeting, as expected, while sounding more hawkish than previously. The SARB expects the rand to remain volatile amid outflows from emerging markets (EM) generally as US interest rates continue to rise – in May global investors withdrew significant amounts of capital from EM bond and equity markets, including South Africa.

Local bonds moved weaker on these factors. With a stronger US dollar in May, the rand depreciated 1.4% against the greenback, but gained 2.0% against both the UK pound sterling and the euro.

Meanwhile, on 25 May S&P Global Ratings affirmed South Africa’s sub-investment grade credit rating at BB (foreign currency) and retained its stable outlook, saying the improvement in economic growth remained tentative and that government debt would remain above 50% of GDP. Its outlook also included the view that the government would undertake economic and social reforms. On this topic, the Ramaphosa team appeared to make progress towards reforming state-owned enterprises (SOE’s) during the month, appointing new board members and top management to several troubled groups. Forensic investigations and enquiries were also ordered. President Ramaphosa also tried to reassure investors that he would not allow the ANC’s more aggressive land policy to damage the economy.

SA equities continued to reflect the more volatile global market conditions and investor reluctance to take on more risk: the FTSE/JSE All Share Index (ALSI) posted a -3.5% monthly total return, weighed down by losses across most sectors apart from Resources.

According to Morningstar data, the average multi-asset high equity (balanced) fund delivered -2.0%, while multi-asset low equity funds averaged -0.8%, and multi-asset income funds returned 0.4% on average.

Article (adapted) by Heidi Dreyer – Prudential Investment Managers