The Russia-Ukraine war persists, and with it the impact on energy and input prices, supply chains and increasing disruption to economic growth. Although the release of strategic oil reserves and global growth concerns has seen oil prices moderate, gas prices in Europe shot up when Gazprom, a Russian majority state-owned energy company, cut gas supplies to Poland and Bulgaria. Although more acute on a regional basis, the conflict has crept into incoming activity data and set the tone for revised growth estimates. The IMF released its updated World Economic Outlook, forecasting global growth of 3,6% for 2022, a downgrade from the previous forecast of 4,4%. The World Bank also revised expectations lower for global growth for 2022 to 3,2%, from 4,1%.
The US economy contracted over the first quarter by an annualized 1,4%, surprising to the downside. Largely a result of an increase in imports, alongside a decrease in exports and a drawdown of inventory, the data also showed an economy benefitting from consumer spending and fixed investment. China recorded economic growth of 4,8% y-o-y in the first quarter of 2022. While this was better than expected, the widespread restrictions imposed since March is likely to reflect in weaker second quarter data. Despite some respite from monetary and fiscal policy, incoming data from the country has shown weakness, raising doubts whether the country will be able to meet the 5,5% growth target for 2022.
MARKET PERFORMANCE (USD)
Between the ongoing war, lockdown restrictions in China and an increasingly hawkish US Federal Reserve, global risk assets had a dismal start to the second quarter. Equities and bonds across most major markets declined, in contrast to the USD, which climbed to new highs, with the DXY appreciating by 4,7% over the month. The S&P 500 lost 8,7% in April, despite a broadly credible earnings season in the US thus far. The rout was even worse for interest rate sensitive growth stocks, with the technology heavy Nasdaq 100 declining by 13,3%. Of course, it would be remiss not to point out the impact of the Tesla share price slide following the announcement of its takeover of Twitter. European indices and Emerging Markets also lost ground, with the MSCI Emerging Markets Index declining 5,5%. The MSCI World Index declined 8,3% in April, bringing returns over the year to date to -12,9% and tipping the 12 month returns into negative territory.
Global bond markets traded under pressure, as bond yields rose to reflect more hawkish sentiment. The US 10-year bond yield approached the 3,0% mark, ending the month just shy at 2,9%. In US dollar terms, the Bloomberg Global Aggregate Bond Index declined by 5,5% in April, bringing the year to date returns to 11,3%.
April saw several central banks across the globe communicate an even more aggressive stance on monetary tightening. The US Federal Reserve minutes confirmed proposals to shrink the balance sheet by circa $95bn per month, almost double the amount in the previous cycle between 2017-2019. Markets now expect a 50bps interest rate hike in May, with some Fed governors even introducing the notion of a front loaded 75bps. Even so, inflation expectations continue to rise despite all the hawkish commentary. Matters remain complex in Europe where borrowing costs have surged in anticipation of the end of the ECB’s asset purchase programme. The German 10-year bond yield topped 1,0% in early May for the first time since 2015. More indebted countries, like Italy, have seen more pressure. Incoming inflation data has further stoked expectations of earlier interest rate hikes. The Eurozone preliminary inflation figure for April printed a new high of 7,5% while German inflation increased to a forty year high of 7,8%. This puts the ECB under even more pressure, especially against a vulnerable growth backdrop.
Front loaded action or evidence of peak inflation (or peak in hawkish expectations) may provide central banks with greater credibility and sooth bond markets. Unfortunately, the former may also carry the risk of stoking or realising recessionary fears.
MARKET PERFORMANCE (ZAR)
Flooding in KwaZulu Natal led to a devastating loss of lives, damage to property and infrastructure and business disruption across the province. A national state of disaster was declared to allow mobilisation of resources. Continued load shedding across the country added to the challenging backdrop and risk to Q2 economic growth outlook, while ongoing strikes in the mining sector also clouds the outlook. On a positive note, Telkom withdrew its high court appeal against ICASA, validating the recent spectrum auction results. Credit ratings agency, Moody’s, upgraded the outlook for South Africa’s credit rating to stable from negative, reflecting an improved fiscal outlook. Preliminary tax and monthly budget data suggest the revenue trends remain constructive, although investors and rating agencies alike acknowledge that external factors such as high commodity prices remain a big driver. Having demonstrated resilience in the face of global volatility, the local bond market and currency gave way to weakness mid-month. Headline inflation increased to 5,9% y-o-y in March, reflecting higher fuel and food prices, despite a temporary reduction in the fuel levy. Against this backdrop, inflation linked bonds delivered 1,9%. The All Bond Index declined 1,7% in April and the Rand weakened by circa 8,3% against the US dollar.
Local equity markets lost ground, with the FTSE/JSE All Share Index declining 3,7%. Technology counters, Naspers and Prosus continued to slide over the month, with the index dragged down further by losses in the financials (-6,4%) and resources sector (-5,4%). Domestically exposed small cap counters ended in the green, outperforming their mid and large cap peers. With many holding companies attracting relatively large discounts in the SA market, corporate actions have increased as companies look to unlock value for shareholders and reconsider a future fit strategy. PSG Group reaffirmed a proposed restructuring which will see the business unbundle its stakes in listed entities such as Curro and PSG Konsult and thereafter repurchase outstanding shares with the intention to delist from the JSE. Pending shareholder approvals, the corporate action is proposed for August. RMI Holdings Limited also unbundled its stake in Discovery and Momentum Metropolitan Holdings in April. The end of an era in some cases, but for others the start of a more focused path.