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VACCINATE & CO-OPERATE
The devastating surge in COVID-19 cases and fatalities in India highlighted the importance of rapid vaccination rollouts. The US have lent their support to efforts, spearheaded by South Africa and India, to get the World Trade Organisation (WTO) to temporarily remove the patent protection on vaccines (Trips waiver), while a number of developed countries have indicated that they would consider sharing vaccine stock once they have vaccinated their entire populations. The latter may reap benefits faster given the complexity of setting up facilities and sourcing materials. However, this highlights that global collaboration is required to help the world move beyond the pandemic faster.
Economic data continues to come in strong, attesting to strengthening activity as economies reopen. The OECD revised their growth outlook to 5,8% from 5,6% in March but highlighted that the recovery remains uneven with emerging markets facing the most challenges. Their advice to governments; vaccinate and co-operate.
MARKET PERFORMANCE (USD)
After a strong start to the year, markets have tempered their response of late, balancing improving data with the rise in input prices and potential for inflation further down the line. US corporate earnings for the first quarter easily beat expectations, with the latest data for S&P 500 companies recording earnings growth of circa 52% (y/y) relative to consensus expectations for circa 24% growth.
The S&P 500 gained 0.7%, while the Nasdaq 100 retreated 1,2%. Other equities markets gained more over the month, with strong performance from Europe and emerging markets against a weak US dollar backdrop and rising vaccinations in Europe. South Africa was one of the star performers in the emerging market universe, with the MSCI South Africa returning 7,2%, outperforming the MSCI Emerging Markets Index (2,3%) and the MSCI World Index (1,5%).
Despite US inflation gauges exceeding market expectations, bond markets took most of the data in its stride with bond yields barely moving. In US dollar terms, the Barclays Global Aggregate Bond Index returned 0,9% in May, while the Barclays Global Inflation Linked Index gained 3,0%.
“NO ORDINARY RECOVERY: NAVIGATNG THE TRANSITION”
The headline above from the recent OECD Global Economic Outlook points out some of the concerns bubbling away under the surface for financial markets. Accommodative monetary and fiscal policy played a big role during the pandemic and the recovery. Looking to the future, many are now asking what the cost will be and whether policy makers can coordinate a transition without unintended consequences.
US CPI and the Federal Reserve’s favoured measure of inflation, personal consumption expenditure (PCE), showed a marked increase in April, with both series exceeding market expectations. Consumer inflation expectations collected via market surveys have also increased, while activity indicators, like the Purchasing Manager’s Indices (PMI’s) have for some time highlighted that businesses face rising input costs. Base effects play a big role, services inflation has remained muted, supply chain issues should resolve itself in time and the rise in used car prices should indeed be transitory. Yet, there is also evidence of upward pressure on wages, even as businesses reportedly struggle to fill jobs. Some attribute this to the enhanced unemployment benefits and other fiscal support measures. Several US states are now planning on scaling back that support.
While the multifaceted debate on future inflation will persist, the reaction function of policy makers has become even more intertwined. It may therefore serve policymakers to acknowledge that this is indeed no ordinary recovery and that both coordination, vigilance and a fine balance will be required to minimise the potential long-term cost of this transition.
MARKET PERFORMANCE (ZAR)
South Africa has been acutely aware of the slow but steady start to its vaccination efforts as the country prepares for the winter months and the expected third wave of infections. Rising coronavirus cases across the country prompted a move back to adjusted Alert Level 2 restrictions at the end of the May and President Ramaphosa clarified the regulatory delays responsible for the holdup in the Johnson & Johnson Sisonke trails.
In line with global trends, the April inflation print showed a meaningful pickup to 4,4%, reflecting base effects from pandemic related price declines in 2020, but also persistent price increases from transport cost (mainly fuel) and food prices. The South African Reserve Bank (SARB) kept interest rates unchanged at their April MPC meeting – a unanimous decision by the committee. While the SARB assessed the inflation outlook to be contained over the forecast period, it expressed vigilance and highlighted increased risks. Releasing credit ratings statements over the month, S&P, Moody’s and Fitch left South Africa’s credit rating unchanged, with Moody’s and Fitch retaining their negative outlook.
The Rand strengthened by circa 5,3% against the US dollar in May, reaching its best level in years, while local bonds benefitted from well supported bond auctions. Currency movements also helped embattled energy provider Eskom, with the company indicating a decrease in debt of circa R83bn, partly helped by exchange rate movements. The All Bond Index gained 3,7% in May, lifting year to date returns to 3,9%. With the inflation debate front and centre of the current market narrative, inflation linked bonds returned 3,4% over the month.
The FTSE/JSE All Share Index continued its winning streak, gaining a further 1,6%. Domestically exposed counters led the charge with the Small Cap and Mid Cap indices gaining 3,3% and 6,2% respectively relative to the Top 40 (1,1%). The financial sector was the best performing sector over the month, gaining 9,2%. Despite a difficult operating environment, a range of companies are reporting credible financial results, including those primarily exposed to the local economic dynamics. Corporate action also caused undercurrents for bellwethers Naspers (-7,9%) and Prosus (-9.7%) as a proposed share exchange was met with a less than favourable response. News that global industry player Heineken was in discussions with Distell to purchase the majority of their business helped the share price gain 34,5%.