OIG Monthly Market Review
Updated: May 16
The JSE had a solid month in April with the FTSE/JSE Capped SWIX Index up 3.4% MoM, leaving it among the top-performing emerging markets, YTD on 6%, while currency weakness, -6.9% YTD, drives it to the bottom when measured in US dollar terms. The positive performance of the JSE was supported by gold and platinum miners. More than a third of the JSE’s April performance was from the gold miners, up 17% MoM, leading to this category being the best-performing industry on the JSE for another consecutive month. Platinum miners were also a strong contributor, up 12% MoM. Amongst the best-performing local shares were FirstRand and Sanlam, both up 7% MoM.
South Africa is predicted to grow at 0.4% this year, according to the Reuters consensus, this is more than the SA Reserve Bank is expecting, they predicted 0.2% and the International Monetary Fund anticipates even less, a mere 0.1%. In spite of very weak economic growth, the market forecasts another 25-basis point interest rate hike at the next meeting in May because of above-target inflation. Consumers are struggling, with the last 9 interest rate hikes, leading to South Africans paying 35% more on their home loans since the start of the rate hike cycle in 2021.
Kgosientsho Ramokgopa, Minister of Electricity wants to stop severe power cuts by adding 4 000MW of electricity to the grid. The plan makes use of additional diesel turbines and more fuel storage. In spite of having the volume to generate 48,000MW, Eskom can only produce a consistent 27,000MW. Occasionally the capacity decrease to between 23,000 and 25,000MW, according to BusinessTech. In summer the demand is around 32,000MW but with winter approaching the demand increases to a potential 37,000MW, this intensifies the risk of higher load-shedding stages. Eskom is still mostly reliant on coal, accounting for 74% of the total capacity, nuclear energy only contributes 3%, while gas, hydro, wind, and solar energy combined contribute approximately 23%, with each source sharing an equal proportion.
The South African Post Office (SAPO), has joined the list of state-owned entities that are experiencing financial difficulties. Since 2013, the organization has consistently lost substantial amounts of taxpayer money, leading to its provisional liquidation. Despite receiving a bailout of R2.4 billion from the National Treasury, SAPO's financial situation has not improved. Management and creditors have until June 1, 2023, to present their arguments in a bid to save the organization.
April was a quiet relief with a decrease in US inflation, the reopening of China, and less worry around the European energy crisis, this led to an increase in economic activity, as confirmed by the JP Morgan Global Composite PMI, which has been on the uptrend year to date. Nevertheless, the World Economic Outlook of the International Monetary Fund (IMF) decreased its global growth to 2.8% in 2023, with developed economies growing at only 1.3%. It is doubtful that global inflation will be back on target before 2025, and global public debt is predicted to continue close to all-time highs.
Global equity markets had a great beginning to the second quarter of the year, with the MSCI World up 1.8% in April.
The latest inflation figures in March were favorable for US markets, with only a slight increase of 0.1% in headline inflation, which was less than anticipated due to falling energy prices. The core consumer price index increased by 0.38%, the lowest monthly print since November. The year-on-year (YoY) core inflation rate remains a concern at a high of 5.60%, shelter inflation, which is the largest component of core inflation, decreased significantly from 0.76% to 0.56% in March.
There is a steady uptrend in initial jobless claims, with the number of "job losers" surging by nearly half a million in February and March combined, marking the largest two-month surge since the pandemic.
Microsoft and Alphabet experienced positive movements in their stock prices, rising by 7% and 4% respectively on a month-on-month basis. Microsoft's earnings exceeded expectations, driven by strong growth in its cloud-computing business, while Alphabet's ad sales showed signs of recovery. Meta, the parent company of Facebook, was among the top-performing tech mega-caps, increasing by 13% on a month-on-month basis. However, Tesla performed poorly, with a 21% decrease in stock price and margins dropping to a two-year low.
Although most large and mega-cap banks posted reassuring earnings that settled investor doubts, First Republic Bank, a mid-cap US regional bank, reported a 41% year-on-year drop in 1Q23 deposits and a plan to reduce its workforce by 25%. Following the announcement, the stock price was halved, and its assets were eventually taken over by JP Morgan in a US Fed-brokered rescue agreement.
The Financial Stability Oversight Council (FSOC) is a regulatory body with the mandate of identifying and monitoring potential risks to the country's financial stability. Recently, the FSOC has increased its focus on non-bank financial institutions that have become noteworthy players in the financial industry. Regulatory authorities are proposing changes to the way non-bank firms are designated and identified. The process will begin with a preliminary examination of publicly available and regulatory data by the FSOC. The second stage involves a comprehensive evaluation that takes into account information provided by the non-bank institution under investigation. The final designation is determined by a vote from the FSOC. The company will undergo annual reassessments, during which it can present its case and provide details of any changes made to address identified risks.
Data showed that the eurozone economy returned to growth in the 1st quarter of 2023 with an expansion of 0.1% quarter-on-quarter after zero growth in the final quarter of 2022. Germany’s economy saw no growth but other economies such as Spain and Italy saw stronger expansion. The pace of inflation in Germany slowed with a rate of 7.2% year-on-year expected for April, compared with 7.4% in March.
In other data, the eurozone purchasing managers’ Index (PMI) for April reached an 11-month high of 54.4. Growth was supported by the services sector, but manufacturing output saw a decline. The PMI indices are based on survey data from companies in the manufacturing and services sectors, where a reading below 50 indicates contraction, while above 50 signals expansion.
In contrast with the slowing U.S. economy, China’s economic momentum is improving, led by consumption and services. The equity Yet, its equity markets, both onshore (CSI300 down 0.5% in April) and offshore (MSCI China down 5.2%) have underperformed the U.S. market. The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
The economy expanded by 4.5% in the 1st quarter of 2023, and this could accelerate further into the second quarter as household spending is making a comeback. Retail sales grew 5.8% in the 1st quarter of 2023 and 10.6% in March. The positive data reduces prospects of substantial liquidity easing in the near term from policymakers. April’s Purchasing Managers’ Index (PMI) came in below expectations, with NBS manufacturing PMI declining to the contractionary territory of 49.2, from 51.9 in March, while non-manufacturing PMI remained elevated at 56.4, underpinning that the current recovery is largely services driven.
The Bank of Japan's (BoJ) April interest-rate setting meeting did not result in any changes, as predicted by the market. However, the bond yield curve control policy, which maintains a 10-year government bond yield level between negative 0.1% and 0.5%, may be adjusted later in the year. The BoJ is wary of making any moves that might be interpreted as a hasty withdrawal of monetary support, as previous rate increases in 2000 and 2006 were blamed for causing a recession.
Breaking out of the past cycle remains a challenge, nevertheless, especially since the ‘shunto’ negotiations only involve the largest corporations. Small and medium-sized enterprises, that employ 70% of Japanese workers, still face significant obstacles in increasing salaries.
Nevertheless, there are expectations that inflation could reach 2% in the next few years due to large companies providing significant pay increases during annual wage negotiations. It still remains challenging to break out of the previous cycle, particularly since only the largest corporations are involved in 'shunto' negotiations. Small and medium-sized companies, which account for 70% of Japanese employees, continue to face obstacles to increasing salaries.
The ongoing Russia-Ukraine conflict has caused a rift in global energy production, leading to the formation of three distinct regions. The American continent is now self-sufficient in energy, while Europe must pay a premium for oil and natural gas imports. Meanwhile, Asian countries can buy Russian oil at a discounted rate using their own currencies. China is Europe's most important trading partner, but the EU is in a dilemma, as it needs to balance the interests of the US and its economy. There is still a high level of geopolitical risk, which causes increased market volatility. In the short term, markets are focused on when the Fed will stop raising interest rates.
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