Global Market and Economic Update

Global markets endured another volatile month as the effects of higher inflation, rising interest rates, continued geopolitical instability and the looming threat of a potential global recession continued to weigh on investor sentiment and asset prices.

Both US and global markets experienced wild swings, as assets continued to sell off heavily in the first half of May, before staging a late recovery towards the end of the month. There was some reprieve for emerging markets. The Chinese government announced an easing of lockdown restrictions after months of its zero-COVID strategy weighing negatively on both the real economy and financial markets. Chinese equities experienced a month-end rally, with both the Hang Seng and Shanghai Composite moving positive after an especially difficult start to the year.

The US Federal Reserve increased interest rates by 0.5% at their meeting in early May. Global inflation remains stubbornly high, with the US inflation print coming in at 8.3% (year-on-year to the end of April), Eurozone inflation registering a higher-than-expected 8.1%, and UK inflation also hitting a multi-decade high of 9%. The Russian invasion of Ukraine continues to put upward pressure on global energy and food prices, with global supply chain issues further exacerbating the largely unprecedented levels of inflation being seen around the world.

South African Market Update

South African equities were relatively flat over the month, with banking and insurance stocks, which are relatively more resilient to rising interest rates, recovering from an especially weak April.

Local bonds were the best performing domestic asset class after experiencing some selling pressure in April. Inflation-linked bonds performed especially well as the market continues to price in the probability of potentially higher-than-expected local and global inflation. Demand for local bonds was mostly from SA investors as foreigners remained net sellers in May.

Local listed property traded relatively flat, with no significant moves from SA REIT’s over the month.

The rand remains especially volatile, but the currency retraced some of the losses against some of the major developed market currencies over the month. Rand gains were more attributable to broader US dollar weakness as the greenback dropped off from 52-week highs towards month end.

South African Economic Update

Local inflation remained unchanged at 5.9% (year-on-year to the end of April), with fuel and food prices lower than the previous prints but continuing to put pressure on headline inflation. South Africa remains one of only a few emerging markets where inflation is coming in within the target band range.

The South African Reserve Bank’s (SARB) Monetary Policy Committee increased the repo rate by 0.5% to 4.75%. This was the largest hike since 2014. The decision to hike was unanimous, with only one of the five MPC committee members voting for a lower 0.25% increase.

South Africa’s unemployment rate declined slightly over the first quarter of the year, coming in at 34.5% versus 35.3% in the previous quarter. Unemployment remains much higher than it should be, but this was the first decline in almost 2 years.

In other positive news, global credit rating agency, S&P, upgraded its outlook on SA from stable to positive with the country rating remaining at BB-/B. This follows the Moody’s upgrade from negative to stable in April.

Chart of the month: Sign of the times. Zoom traded at a higher market cap than ExxonMobil in 2020. Today Exxon is trading at roughly 10 times the market cap of the popular online meeting platform. A timely reminder that price does not equate to value.

See below for a summary of the key market movements for the month of May:

• The JSE All Share Index (-0.4%) ended the month slightly lower, but largely recovered from the Resource and Financials-led decline in April.
• Resources (-0.4%) and Industrials (-2.2%) continued to experience selling pressure over the month while Financials (+3.5%) recovered after being down in April. All the major banks including Nedbank (+7.1%), Absa (+6.9%), Investec (+6.8%), Standard Bank (+6.4%) and FirstRand (+5.7%) were top 10 market performers over the month.
• Listed property (+0.1%) was marginally up over the month and continues to claw back some gains after a difficult start to the year.
• Local bonds (+1.0%) ended the month higher, and were the best performing domestic asset class after being buoyed by a positive outlook upgrade from rating agency S&P.
• Cash delivered a reasonable return of +0.4% for the month.
• Most of the major developed equity markets ended the month in positive territory, after enduring a tough start to the month and rebounding towards month end. The MSCI World Index delivered a return of +0.2% for the month.   
• Emerging market equities experienced some much need respite, after the decline in Chinese equities stemmed in May. The MSCI Emerging Markets Index delivered a return of +0.5% for the month. 
• Most of the major global equity markets enjoyed a slight rebound after a difficult April and ended the month in positive territory. The UK’s FTSE 100 (+1.5%), Germany’s FSE DAX (+3.6%) and Japan’s Nikkei 225 (+2.3%) all delivered positive performance for the month. China’s Shanghai SE Composite (+3.5%), which has been under significant pressure on a year-to-date basis, also experienced a positive turnaround over the month.
• US equities had mixed fortunes over the month. The S&P 500 (+0.2%) moved slightly higher while the NASDAQ 100 (-1.5%) continued to fall as technology companies’ growth and earnings expectations came under persistent investor scrutiny.
• In terms of the major commodities, Oil (+12.4%) experienced a sharp move upwards as Brent Crude Oil prices rose to above $120 per barrel. This was largely attributable to rising gasoline consumption in the US as well as the recently announced EU embargo on the majority of Russian oil imports.
• Platinum (+3.3%) was positive over the month while Gold (-3.8%) ended the month lower. 
• Rand performance was relatively stable for the month against the major crosses. The rand gained against both the pound sterling (+1.1%) and the US dollar (+1.5%), while the performance against the euro (-0.1%) was marginally down over the month.