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April offered up a multitude of data to gauge the different stages of recovery and progress. The IMF upgraded their outlook for global growth for 2021 (6,0%) and 2022 (4,4%), driven by continued fiscal support in many of the major economies, the reopening of economies as well as a stronger recovery from the US. First quarter growth numbers and activity data, however, provided a reminder that the progression of recovery is still as varied as the pace of vaccination and ability to extend financial support.
Manufacturing activity has been the backbone of the recovery thus far, but encouragingly, services PMI data is gaining traction in countries where mobility is improving due to vaccinations. First quarter US GDP came in at 6,4% annualised, broadly in line with market expectations. With ample progress on vaccine rollouts, incoming US data confirms a recovery that is gathering pace, with benefit cheques filtering into the economy and employment numbers improving. US retail sales printed a 9,8% increase in March and has now exceeded pre-pandemic levels by circa 17%. Having been in lockdown for much of the period, the Eurozone contracted by 0.6% in the first quarter. After a difficult start however, Europe is increasing the pace of vaccinations and is slowly moving beyond its winter pandemic peaks. Chinese GDP came in at 0.6% over the first quarter, bringing the yearly number to a staggering 18,3% - a reminder to be mindful of base effects.
Markeket indicators (USD)
Equities had another strong month with the US leading the way. The S&P 500 gained 5,3%, providing momentum for a 4,7% return from the MSCI World index with emerging markets also gaining over the month.
Rising bond yields caused much volatility in the first quarter, with the US 10-year bond yield increasing by circa 80bps. Arguably having frontloaded the data that is
now emerging, Treasury yields fell back from the peak March levels, providing a tail wind for interest rate sensitive assets. In US dollar terms, the Barclays Global Aggregate Bond Index returned 1,3% in April, while emerging market debt gained 1,9%. Local currency bond investors also benefitted from a decline in the trade weighted dollar of circa 2,1%, to the benefit of emerging market currencies.
The ebb and flow of seasons, new variants and vaccine rollouts continue to emphasise a still fluid environment. Corona virus cases have started to rise again across Asia with about a third of new cases coming from India, which has faced a devastating surge in infections and fatalities.
Build back better
US president Biden’s first 100 days have passed with some bold spending plans as he pursues his “Build Back Better” agenda to rescue, recover and rebuild the United States. The three-part agenda was formally initiated in March, with the passage of the $1,9 trillion American Rescue Plan, which provided further pandemic relief, extending support for households and workers via direct stimulus payments of $1400, unemployment compensation and tax relief. Another two spending packages have since been announced, with a focus on rebuilding and recovery. The $2,3 trillion American Jobs Plan outlines infrastructure investment to be implemented over the next eight years while the $1,8 trillion American Families plan extends the social safety net for the next decade, with emphasis on education, childcare and other social initiatives. The plans also propose increased taxes for corporates, higher income brackets and those paying capital gains tax and firmer compliance measures as a funding mechanism.
While the pandemic support packages of 2020 and March 2021 garnered broad support from Congress, it is safe to say that some compromises will be on the cards for the rebuild and recover proposals. With the US recovery already gathering pace, many are asking whether the size of these proposals is truly warranted, who will really pay and will this be the fuel for future inflation.
Market indicators (ZAR)
The local pandemic efforts continue to make headway, be it at a slow pace. South Africa has now reportedly procured enough vaccinations to reach the targeted numbers, while registrations for the broader population have formally opened. In line with US regulators, local medicines regulator (SAHPRA) temporarily halted the J&J Sisonke implemented study to allow investigations into side effects from the Johnson & Johnson vaccine. By month end, however, the suspension was lifted, but with additional conditions attached to its use.
South Africa continues to benefit from the tailwinds of a global economic recovery, in more ways than one. While improved activity from major trading partners supports industry and local growth, increased exports and export prices, most notably for the commodities mined locally, against weak import demand has also provided a constructive backdrop for the Rand, which has held its own relative to other emerging market currencies. Incoming domestic data also suggest a broader economic recovery is underway with improved activity across various sectors and services as restrictions eased. Retail sales, mining data and vehicle sales all showed improvement, with vehicle sales returning to pre-covid levels. These trends bode well for tax revenues, providing some balance to public sector wage negotiations which are off to a predictably rocky start. With the global trends providing the sun, one hopes that reforms underway will provide for hay when it matters.
Local bonds also benefitted from the decline in global bond yields, with added support from constructive local data. The March inflation print was recorded at 3,2%, bringing the inflation numbers back into the SA Reserve Bank’s range of 3-6%. The increases were well anticipated as base effects, a higher fuel prices and yearly tax increases added upside pressure. Core inflation came in at 2,5%, with both prints below market expectations as lower housing costs surprised to the downside. The All Bond Index gained in 1,9% in April, bringing the year to date returns into positive territory (0,1%) while Inflation linked bonds returned 1,1%.
The FTSE/JSE All Share Index gained 1,0%, bringing the 12 month returns to a pleasing 36,4%. Small cap stocks once again delivered credible results with the Small Cap index up 5,6% relative to headline numbers from the Mid Cap stocks (2,4%) and the Top 40 (0,6%). Bellwethers Naspers (-6,3%) and Prosus (-3,7%) both lost ground, while noteworthy returns came from chemicals (13,6%), largely driven by Sasol (15,3%). The best performing asset class, however, was the interest rate sensitive property sector, rebounding 11,7% in April.