The divergence in vaccination campaigns between the developed and the emerging economies has been made even more stark by the spread of the Delta variant across the world. Pledges from G7 members of vaccine supplies to those with need, including South Africa, will go some way to improving timelines and staying ahead of new variants and reinfection. The broadening of economic activity to the services sector is increasingly adding to global economic growth, even if the full reopening of economies remains elusive.
MARKET PERFORMANCE (USD)
Despite regional differences, risk assets delivered a strong performance in the second quarter with the MSCI World Index gaining 7,9%. The S&P 500 advanced 8,5%, with the underpin of a strong corporate earnings season, approval of further fiscal stimulus and a rebound from technology stocks in June, which helped the technology heavy Nasdaq 100 gain 11,2% over the quarter. European markets staged a credible comeback as vaccinations accelerated and economies reopened, despite lacklustre Q1 GDP prints. With markets concerned about policy tightening in China, in addition to regulatory changes, Asia underperformed on a relative basis.
For many countries, inflation prints over the quarter exceeded expectations, but a similar result for US inflation gauges and the resultant US Federal Reserve’s (Fed) response was the main bellwether for market volatility. Having priced for this outcome in advance and with a more hawkish tone emerging from the US Fed in June, the US 10-year bond yield fell back circa 30bps from the peak March levels to end the quarter at 1,4%. In US dollar terms, the Bloomberg Barclays Global Aggregate Bond Index returned 1,3% in June. This provided an even greater tailwind over the quarter for other fixed income assets including inflation linked bonds, emerging market debt and corporate credit.
TRANSITORY TO TAPERING
Ending the second quarter above the $75 a barrel mark, the oil price hit its highest level since 2018. After the lows of the pandemic induced lockdowns, weather related disruptions to supply was a driver for the increase in price. More recently, however, a rebound in global activity and hence demand, in conjunction with supply discipline from the oil majors, has been the more prominent driver. While demand is likely to continue improving, there should ultimately also be some normalisation of supply. The timing thereof, will be influenced by the outcome of the OPEC+ meeting at the start of July, with members discussing the cautious increase of supply. In the meantime, the lack of investment in the sector remains a concern for some market participants, especially given the impact of higher fuel prices on global inflation.
Global central banks have started to use language more alert to the potential for pricing pressures beyond base effects. The US Fed continues to support the premise that inflationary pressures will be transitory but refined their communication at the June meeting to reflect a slightly more hawkish stance. The median committee member now expects two interest rate hikes in 2023, bringing forward the tightening cycle. While the monetary policy setting will remain accommodative for some time to come, the level of support will likely abate. Talk of tapering or the withdrawal of liquidity will no doubt become one of the main drivers of potential volatility for markets that have become used to, if not dependent, on easy financial conditions.
MARKET PERFORMANCE (ZAR)
The Constitutional Court found former president Zuma guilty of contempt of court and issued a sentence of 15 months imprisonment. While the rule of law features prominently in the words of the ruling, their consequences perhaps speak even louder.
Reforms took centre stage in June and appear to be gaining momentum. Government confirmed that Takatso, a consortium of private investors, will be the preferred equity partner for embattled air carrier, South African Airways, acquiring a 51% equity stake upon completion of the deal. President Ramaphosa announced restructuring at Transnet, which will see the entity unbundle the ports business to establish a new, independent Transnet National Ports Authority. Continuing the ongoing reforms in the energy space, the electricity self-generation limit will be increased to 100MW from 1MW previously. This exceeds the 50MW the private sector had been campaigning for and vastly increases the potential for generation capacity and a move to sustainable energy availability for the country. Should the announcements pass through the formal channels, these actions will surely help rebuild the credibility of the state and the country.
In line with expectations, consumer and producer inflation accelerated again in May. With much of this already priced in by the markets and a more reserved tone from global central banks, inflation linked bonds returned -1,5% over the month. The All Bond Index gained 1,1% in June, bringing the returns over the quarter to 6,9%.
First quarter GDP was recorded at 1,1% (qoq, not annualised), supported by growth from the mining and finance sectors. The local equity market lost ground, with the FTSE/JSE All Share Index ending the month down 2,4%, led by a downturn in the resources sector (-6,5%). Over the quarter, domestically exposed small and mid-cap counters demonstrated more resilience than large cap counterparts, while the property sector finished the quarter as the top performer. With the Delta variant spreading rapidly in South Africa, the severity of the third wave prompted a move to Alert Level 4 restrictions for two weeks, to be reassessed in early July. While the global recovery is providing cyclical tailwinds, stricter lockdowns are an unfortunate setback.