OIG Monthly Market Review

The recent diplomatic tensions between the South African (SA) and United States (US) governments, arising from allegations of arms sales to Russia by SA, resulted in a sell-off in the domestic markets. Currently, a local investigation led by a retired judge is underway to determine the veracity of these claims. However, until the investigation concludes and clears the government of any wrongdoing, the markets will continue to factor in a risk premium.

August holds significance due to two key events: the BRICS Summit and the renegotiation of the African Growth Opportunity Act (AGOA). The BRICS Summit is highly likely to be hosted by SA, and if Russian President Vladimir Putin does not attend in person, it will spare SA from further diplomatic repercussions, such as the potential arrest of a sitting president of a BRICS ally under the jurisdiction of the International Criminal Court (ICC). This outcome would be beneficial for SA, as it would demonstrate the avoidance of further fallout. Remaining in AGOA would indicate that the diplomatic tensions between SA and the US are not irreparable but rather constructive. Both the hosting of the BRICS Summit without complications and SA's continuation in AGOA are necessary to alleviate the risk premium associated with the South African rand and bond yields.

In the past month, the South African stock market experienced its fourth decline in six months, as indicated by the FTSE/JSE Capped SWIX Index, which dropped by 5.8% month-on-month. However, this performance was somewhat distorted by the weakening local currency.

Among the worst-hit sectors were local retailers, both in discretionary and general categories, as they faced challenges posed by constrained consumers and rising costs, particularly due to the need to generate their own electricity. Companies like Spar, Tiger Brands, and Pick 'n Pay saw their market values decline by approximately 25% in May, as their earnings announcements and trading updates revealed significant damage to their profits.

Transaction Capital, after releasing its earnings, experienced a massive 43% month-on-month decline in share price. This marks the second time this year that Transaction Capital has been the worst-performing share on the JSE, as it had already fallen by 60% in February when management first alerted investors to the need for a major operational overhaul.

In contrast, gold shares were a bright spot on the JSE, posting a 3% increase. This was mainly supported by a weaker rand, which offset the lower US dollar gold price by 1.4%.

The South African currency experienced significant weakness in May. Year-to-date (YTD), the local currency has depreciated by 13.5% against the US dollar, with only the Argentine peso performing worse YTD (-25%). The currency's weakness was primarily attributed to plummeting investor confidence following allegations by the US ambassador that South Africa had supplied weapons to Russia. Additionally, the government's borrowing costs surged, with the 10-year government bond yield rising more than 1% to 12.4% during the month, reaching levels last seen during the initial COVID-19 panic in March 2020.

The South African Reserve Bank (SARB) raised interest rates by 0.5%. This marked the tenth consecutive rate hike in the past 18 months, with rates increasing by 4.75% during this period. Despite clear signs of economic weakness, the SARB felt the need to address inflation concerns. Core inflation, currently at +5.3% YoY, remains comfortably above the SARB's target level of 4.5%, with potential risks stemming from currency weakness.

*Source: Trading Economics

Global

The past month witnessed a predominantly bearish sentiment across major global markets, the market experienced a decline as expected midyear volatility increased. The MSCI World index, with a monthly change of -0.9% and a year-to-date change of +8.8%, reflected this turbulent period. Investor sentiment was hampered by concerns surrounding a potential US debt default, elevated inflation levels, and the looming possibility of a US recession.

News emerged of an agreement between President Joe Biden and US House of Representatives Speaker Kevin McCarthy regarding the debt ceiling. Furthermore, investors were unsettled by unexpectedly robust US labor market data, fearing that it might prompt the US Federal Reserve (Fed) to consider another interest rate hike in June. This added to the overall apprehension in the market.

Despite the challenges, there were some positive developments. US corporate earnings continued to exceed expectations.

US

Despite a strong rally in artificial intelligence-related stocks and other technology names, the Dow Jones and S&P 500 indices had a less favorable month. The Dow Jones declined by 3.5% and is down 0.7% year-to-date, while the S&P 500 saw a modest 0.2% increase, resulting in an 8.9% YTD gain.

In US economic data, the April Consumer Price Index (CPI) showed a slight decrease to 4.9% year-on-year (YoY) from March's 5.0%, falling below expectations. Core CPI, which excludes food and energy components, also declined to 5.5% YoY in April compared to 5.6% in March. MoM headline inflation met expectations, rising to 0.4% in April, while core inflation remained unchanged at 0.4% MoM.

*Source: Trading Economics

Retail sales in April increased by 0.4%, below consensus forecasts of a 0.8% gain but better than the previous month's downwardly revised 0.7% drop. the Fed's favoured inflation measure, Personal consumption expenditure, rose 0.4%in April, surpassing expectations. YoY, PCE increased to 4.4% in April, higher than the anticipated 3.9%.

The Federal Reserve's Federal Open Market Committee (FOMC) raised rates by 25 basis points (bps) during its May meeting, in line with expectations. This brought the federal funds rate to the range of 5% to 5.25%, the highest level since 2007. Fed Chair Jerome Powell stated that future rate hikes will depend on incoming data, but the possibility of further increases remains open.

UK

In May, UK equities experienced a decline, primarily driven by a general weakness in commodity prices. Among the notable decliners were large UK-quoted diversified energy and basic materials groups. However, the technology sector managed to buck the trend and recorded a positive return. Financials also performed relatively well, thanks to the resilience of the banks’ sector, which maintained its value throughout the month.

During the month, the Bank of England (BoE) raised the base rate by 25 basis points, marking the 12th consecutive rate hike. The base rate increased from 4.25% to 4.5%. Additionally, the BoE revised its growth and inflation forecasts upward. Shortly after this announcement, the Office for National Statistics (ONS) confirmed that the UK economy grew by 0.1% in Q1 2023. These developments further strengthened the belief that the UK economy would avoid a recession this year.

In April, consumer price inflation in the UK slowed down less than anticipated, reaching 8.7% compared to 10.1% in March, according to the Office for National Statistics (ONS). However, core inflation, which excludes volatile items like energy and food to reveal underlying trends, increased from March and reached 6.8%. This is the maximum level since 1992. These figures have further intensified expectations of a rise in UK interest rates, as it is widely acknowledged that the Bank of England (BoE) needs to take further action to control underlying inflation.

Europe

In Europe, Germany's DAX index experienced a monthly decline of 1.6% in May (up 12.5% year-to-date), while France's CAC Index dropped by 5.2% during the same period (up 9.7% year-to-date). The euro area's annual inflation rate for April was 7.0% year-on-year, slightly higher than the 6.9% recorded in March.

Germany, being the largest economy in Europe, entered a technical recession in the first quarter of 2023. Recent data revealed a downward revision of its gross domestic product (GDP), with the revised figure for the first quarter showing a year-on-year contraction of -0.3% (previously estimated at zero growth). The fourth quarter of 2022 also witnessed a 0.5% year-on-year contraction in Germany's economy.

China

In China, consumer confidence remains lower than pre-lockdown levels, while households have accumulated a significant amount of cash. Home prices have started to stabilize in most cities, which has boosted household confidence and supports the narrative of a consumption-driven recovery. The services sector is bouncing back more strongly compared to the weaker performance of the manufacturing sector. During the 1 May holiday, tourism revenue surged by an impressive 130% compared to the previous year. However, industrial output and fixed investment growth in April were slower than expected. Youth unemployment reached an all-time high of 20.4%. The Chinese economy is growing below its potential, this is reflected in the sluggish increase in the Consumer Price Index (CPI) and the negative figures of the Producer Price Index (PPI) indicated by a slow Consumer Price Index (CPI) and strongly negative Producer Price Index (PPI) figures. This introduces the possibility of a base rate cut, along with targeted policy measures, to stimulate credit growth. The Chinese stock market remains 30% below previous highs, presenting opportunities with low valuations and accelerating earnings.

FUND PERFORMANCE REVIEW | MAY 2023

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While every care and effort has been taken to ensure the accuracy of the information provided, any information shared in this document does not constitute advice as defined in the Financial Advisory and Intermediary Services Act, 2002. It is your responsibility to get professional advice to accompany you with the information read, that will suit your personal circumstances.