25 May 2016
The US Federal Reserve kept the interest rate unchanged at the April policy meeting. April also marked the start of the “earnings season” in the US with corporates beginning to report first quarter performance results. The blended earnings year-on-year for Q1 2016 was -7.1% marking the fourth consecutive quarterly year-on-year earnings decline. Furthermore, investors were further disappointed in April when the OPEC and Non-OPEC regions met in Doha on the 17 April where they could not reach consensus on whether or not to freeze oil supply. The deal that many oil-producing nations were hoping for did not materialise.
Locally, the annual inflation increase in April was slightly lower than market expectations (coming in at 6.2% y/y instead of 6.3%). Despite this, the outlook for the second half of 2016 still remains bleak as rising food prices, water and electricity tariffs and severe drought conditions still threaten to push inflation up to an estimated 8% by the end of the year. The rand, however, appreciated considerably against the US dollar and is up 8.1%% year to date as at the end of April 2016. Other emerging market currencies such as the Russian ruble (11.6%) and the Brazilian real (11.6%) were also stronger against the US dollar. It should be noted that the improvement in the emerging market currencies should not be misinterpreted as an improvement in the economic fundamentals of these emerging markets.
South Africa’s annual headline inflation rose by 6.2% y/y in April, slowing from 6.3% in March 2016. Inflation came in slightly lower than market expectations, as a slowdown in petrol prices offset substantially higher food prices. Annual core inflation which excludes the cost of food, non-alcoholic beverages, petrol and energy was at 5.5%, slightly up from 5.4% in the previous month. On a monthly basis consumer prices rose by 0.8%, at a similar pace as in March, with upward pressure coming from transport prices which rose to 2.7% from -0.8% in the previous month. Food and non-alcoholic beverages went up 1.9% from 1.6% in March and housing and utilities edged up 0.1% (+0.8% in March).
Economic data released in April showed that unemployment worsened overall during Q1 2016, increasing to 26.7% from 24.5% Q4 2015. This was above the market’s expectation of 25.3% and the highest reading since September 2005. The number of unemployed persons rose by 10%, whereas employment fell by 2.2% with the largest losses being reported in the utilities (-9.9%), manufacturing (-5.8%) and construction (-5.3%) sectors. This signifies a marked challenge in addressing the issue of economic growth in South Africa.
South Africa recorded a trade surplus in March of R2.9 billion compared with an upwardly revised R1.07 billion deficit in the previous month, while staying below market consensus of a R4.65 billion deficit. This was mainly driven by exports which climbed by R5.66 billion (+6.3%) due to higher sales of mineral products (+17%), base metals (+11%) and precious metals and stones (+6%). South African major export destinations were China (8.4%), Germany (8.3%) and the US (8.0%). Imports rose by 1.6% to R93.2 billion from R91.7 billion in the previous month, with mineral products (+23%) and plastics and rubber (+22%) purchases leading the increase. The main sources of imports were China (14%), Germany (13%), the US (6.6%), India (5.1%) and Japan (3.7%).
Locally, the ALSI gained 1.70% (4.87% in USD), assisted mainly by resource stocks (+13.45%). This was followed by industrials, which gained 1.98% on the back of retailers (+3.52%). The SA industrial index (which includes the dual-listed companies) posted a -0.89% return for April. By market-cap, all indices ended stronger. Mid-caps added 4.59%, followed by small caps (+5.95%) and the Top 40 shares which gained 1.09%. Resources (+13.45%) was the top performing industry followed by telecommunication (+8.25%) and healthcare (+2.34%). Gold mining delivered +5.42% in April, up from -2.07% in March, supported by Anglo American (+37.21%), Goldfields (+10.66%) and AngloGold Ashanti (+10.51%). Steinhoff International (-8.15%), Nedbank Group (-6.25%) and FirstRand (-5.42%) were the worst performing large-cap stocks while Anglo American (+37.21%), BHP Billiton (+17.47%) and Anglo American Platinum (+13.62%) led the gains in the large caps. The financial index was mainly dragged down by the banks in the Top 40 index, namely, Nedbank Group (-6.25%), FirstRand (-5.42%), Barclays Africa Group (-3.54%) and Standard Bank Group (-3.59%). Foreigners were net sellers of R21 billion worth of equities for the month and R42.9 billion YTD. In the month of April, the rand strengthened against the US dollar (-3.03%), the euro (-2.39%) and the pound sterling (-2.48%). It weakened against the yen (+2.61%). The rand exchange rate has recovered somewhat from the lows experienced in December and January, but nevertheless remains highly volatile, and vulnerable to both domestic and global developments.
Local fixed income markets saw the ALBI (+1.85%) underperform inflation linked bonds (+3.29%), but outperform cash (+0.56%). Preference shares added 7.52% for the month. The longer end of the yield curve (12yrs+) was the best performer (+2.26%), followed by 7-12yr bonds (+1.61%) and medium-term bonds (3-7yr) which gained 1.38%. SA listed property (a hybrid asset class) gained 1.95% in April. For the month, foreigners were net buyers of R8.8 billion worth of bonds and R24.6 billion YTD.
April was largely positive for most asset classes in global markets. However they succumbed to market jitters towards the end of the month. Worries over global growth continued to plague investors, with weaker-than- expected gross domestic product (GDP) reports coming out in the UK, US and China. Central banks continued to ease their monetary policies in response to very low inflation rates.
In rand terms, emerging market equities (-2.63%) underperformed global developed market equities (-1.69%) as the rand strengthened by 3.03% against the US dollar. The MSCI Developed World Index gained 1.38% in USD while the MSCI Emerging Markets Index gained 0.40% in USD over the month. Developed market property returned -0.30% in USD whereas bonds gained 1.33% in USD. Looking at developed markets, Japan’s Nikkei and Canada’s TSX Indices were the only ones that yielded positive returns of 2.19% and 3.72% in ZAR. The Nasdaq (-4.91%), S&P 500 (-2.76%) and Germany’s DAX (-1.72%) were the worst performers for the month in ZAR. In emerging markets, China’s Shanghai Composite index declined 2.18% in its base currency and 5.60% in ZAR. The US dollar depreciated against the euro (0.61%) and the British pound (1.66%).
Global developed market equities (1.38% in USD and -1.69% in ZAR) outperformed emerging market equities (0.40% in USD and -2.63% in ZAR) in April 2016. Developed market property lost 0.30% in USD and shed 3.31% in ZAR. Meanwhile, global bonds gained 1.33% in USD and shed 1.74% in ZAR, slightly underperforming their equity counterpart. Locally, the ALSI gained 1.70% (+4.87% in USD) largely on the back of Resources (+13.45%) and Retailers (+3.52%). Industrials (excluding dual-listed companies) increased by 1.98% while financials declined by 0.32%. The longer end of the yield curve (12yrs+) was the best performer on the yield curve, returning 2.26%, followed by 7-12yr bonds (+1.61%). The shorter end (1-3yr) delivered +0.99% outperforming cash which delivered 0.57%. SA listed property delivered a positive return of 1.95% in April, a significant decrease when compared to its 9.48% increase in March 2016.