OUTvest Market Commentary - May 2022

South African Market

South African COVID-19 cases seem to have plateaued, the 7-day moving average was just over 3600 at the end of May from just over 7000 in mid-May. What is encouraging is that the 5^th wave was less severe than the previous waves and no lockdown restrictions were required to curb cases. This implies that COVID-19 is slowly transitioning from a pandemic to an endemic[i].

Credit rating agency Standard & Poor revised South Africa’s credit outlook from stable to positive, while still affirming the long-term debt local and foreign at BB and BB-m respectively. The credit agency notes and welcomes the implementation of key structural reforms under the Presidency and Treasury’s initiative operation Vulindlela.   S&P also sighted that more favourable trading conditions are expected to improve South Africa’s fiscal trajectory. S&P also expects South Africa to post a trade surplus for a third consecutive year, as metal prices  are elevated due to the Ukraine-Russian conflict.[ii]

The South Africa Reserve Bank monetary policy voted to hike interest rates by 50 basis points, pushing the Repo Rate to 4.75%. Governor Kganyago stated the rate hike was based on the global economic outlook, which has been negatively affected by the Ukraine-Russian conflict, as well as the ongoing COVID-19 crisis. Four out the five  MPC members voted for a 50 basis points increase, while one voted for a 25 basis points increase. The Bankof last resort  forecasts inflation to gradually normalize in 2024.

Due to the conflict between the Ukraine and Russia, which subsequently led western nations to sanction Moscow, and the latest round sanctioning oil imports, caused the world’s oil benchmark (Brent Crude) to reach $120 per barrel. South Africans are now paying a record R24 per liter for 95 octane petrol. The already stretched consumer is now facing multiple price pressures, from rising rates to electricity and municipal charges s.  Inflation came in at 5.9% in April, unchanged from the previous month. Inflation is expected to remain  elevated  as oil prices remain elevated and inflation in developed markets is at multi-decade high. [iii].

South Africa’s unemployment rate slightly decreased in the first quarter of 2022, the official unemployment rate fell to 34.5% from 35.3% the previous quarter. The economy added 370 000 jobs in the first quarter of 2022. The biggest job gains were recorded in Community and Social Services (281,000), Manufacturing (263,000), and Trade (98,000). However, there were job losses in Private Households (186,000), Finance (72 000), Construction (60,000), and Agriculture (23,000). South Africa has a total of 7.9 million people without a job, while 13.9 million people are not economically active. The more worrisome number is the stubbornly high youth unemployment rate, currently sitting at 63.7%. Stringent labour policies, poor basic education, and lack of critical skills are key reasons for high youth unemployment.[iv]

The Absa seasonally-adjusted  Purchasing Managers Index, which measures expected manufacturing growth,  to 54.8 from 50.8 in the previous month. A reading above 50 indicates an expansion. The May results indicated the 10^th month of expansion in the manufacturing sector. The manufacturing sector remains resilient, despite the KZN floods which disrupted supply chain, continuing rolling blackouts by the state utility Eskom, and labour disputes. The availability of electricity remains one of the constraints the manufacturing industry’s currently facing. [v]

South African equities closed slightly lower in May. Financial services were the star performer with the Fini 15 gaining more than 4% for the month, after losing 6% in April. One of the best performers for the month of May was Grindrod. Following an offer from African Bank to buy Grindrod Bank for R 1.5 billion, the diversified company  share prices jumped 22% for the month of May. Gold miners felt the wrath of the market in the month of May, as the worst performers on JSE were dominated by bullion producers. Gold Fields lost more than 29% in May after the yellow metal producer embarked on an offshore strategy which the market didn’t seem too fond of. Gold Fields offered to buy Canadian gold miner Yamana Gold, for a whopping R103 billion in an all-share deal, which will result in dilution of shareholding. Golds Fields nearly lost 30% of its value in May alone. The higher rate environment pushed the yellow metal lower in May, as gold and rates have an inverse relationship (usually, when interest rates increase – the gold price is lowered). The bullion lost 3% in May.[vi]

South African fixed income performed relatively well in May, and inflation-linked bonds outperformed sovereign bonds by nearly 1%. The South African government’s 10-year bond yield followed global trends and closed slightly lower at 10.3%.[vii]

US Market

The Federal Reserve (Fed) hiked interest rates by 50 basis points for the first time in 22 years, at the same time the Fed is also expected to reduce its bond holdings by $ 95 billion per month. The Fed is expected to continue raising rates by 50 basis points in June and July meetings, as Jay Powell and company try and aggressively fight against a 40-year high inflation number[viii].

The world’s biggest economy had 11.4 job openings at the end of April, meaning for every unemployed person there are 1.9 job openings. The job market can exacerbate the inflation pressure, as wage inflation is expected to increase. Workers may flex their muscles as the job market is currently tight t.[ix]

The United Stated (US) Purchasing Manufacturing Index (PMI) improved slightly, to 56.1 from 55.4. The survey noted that the demand is still relatively strong. The supply chain bottlenecks are still a challenge and were exacerbated by the Chinese lockdown restrictions.[x]

US equities started May on a bad note, as inflation concerns and a hawkish Fed weighed on market sentiment. The final week saw the market recovering most of the losses for the month, the US bourse ended the month marginally up 0.2% (S&P 500)  The last week of May was the best week since November 2020, as the S&P 500 was up more than 6% for the week. Elevated energy prices helped the energy sector gain 16% for the month of May. The once high-flying Information Technology sector is down nearly 20% year-to-date as valuations are revised because of rising rates.[xi]

Most US fixed income indices were up for the month of May [xii]

European Markets

The Russia-Ukraine conflict has entered its 4^th month with no sign of a resolution. European leaders introduced new sanctions aimed at applying pressure on Moscow. European Union leaders agreed to ban 90% of Russian crude oil by the end of the year. The union imports 36% of its oil from Russia. Moscow is the 3^rd largest producer of crude oil after Washington and Riyadh. The move could backfire as the Kremlin could cut oil production and sell its oil at a higher price to cushion against the sanctions. Given that inventory levels are extremely low, and refinery capacity is still limited due to years of underinvestment, a Russian oil production cut could be detrimental to the world economy.[xiii]

Eurozone inflation is expected to hit a record high of 8.1% in May, from a record 7.5% in the previous month. Soaring food and energy prices were mainly caused by the Russia-Ukraine conflict. Energy prices increased by a whopping 39%, while food, tobacco, and alcohol prices rose by 7.5%. This shows how the Ukraine-Russia conflict is a global exporter of inflation, as Ukraine is a key exporter of wheat and corn. In addition, Russia is a major player in gas and oil production. [xiv]

Christen Largarde is expected to introduce drastic measures to fight the record inflation number, and the European Central Bank (ECB) is expected to increase rates for the first time in almost a decade during their committee meeting in June. The rate increase is expected to accelerate to 50 basis points by September. [xv]

The European Labour market remains very strong. The United Kingdom’s unemployment rate is at levels last seen in 1974, while the Eurozone’s levels are the lowest since the record started. This supports the acceleration of wage inflation.

The pan-European S&P Stoxx 600 had dropped 0.8% in the month of  May , with retail stocks shedding 1.7% that lead to losses while oil and gas stocks added 0.3% on the back of spiking oil prices. For the month of May, the index closed down 0.85%.[xvi]

European fixed income indices continued their losing streak into May. Eurozone sovereign bonds lost 1.6% in May alone and 9% year to date. UK inflation linked bonds experienced a harsh May,  as they lost nearly 9% for the month. [xvii]

Emerging Markets

The Chinese government continued its zero COVID-19 policy into May, and major cities such as Shanghai and Beijing spent most of the month in lockdown. What is pleasing is that the Chinese government announced it will gradually ease COVID-19 restrictions in June.[xviii]

The Turkish central bank kept rates unchanged, despite inflation reaching nearly 70%. In their statement, the Turkish central bankers attributed the high inflation to geopolitical tensions. The decision is in line with President Recep Tayyip Erdogan’s stance on monetary policy.[xix]

Sri Lanka missed its grace period to pay the coupon on its debt obligation, causing the country to default for the first time since they gained independence from Britain in 1948. The country recently experienced political instability, fuelled by squabbles between President Gotabaya Rajapaksa and the Parliament of Sri Lanka. Tensions sparked anti-government protests and demonstrations by the public due to the economic crisis that has been unfolding[xx]. 

Emerging markets experienced a lateral move with a 0.03% increase in May, due to the contrasting regional performance. Latin American markets increased the most, with Chile (up 19.8%) posting its largest monthly increase in 13 years. Hungary (down 13.8%) and Pakistan (down 10.5%) decreased the most.[xxi]

Note to OUTvest Clients

At OUTvest, we wish to reassure our clients that we remain focused on protecting our clients’ investments from permanent capital loss, by continuing to hold a well-diversified portfolio of quality investments that we expect will compound our clients’ wealth over the longer term. Despite poor performance in recent months, we still believe our asset allocation includes quality assets and strikes a good balance between risk and reward. The changes in our asset allocation we are planning to embark on are not informed on current losses we experienced of our funds, but on a structural and regulation changes we experienced in recent months.

We are monitoring current local and global market dynamics, and we expect heightened volatility to continue in the near term. One of our core principals remains: time in the market, not timing the market, which is still best strategy in creating long-term wealth.