Market Commentary: March 2019
Here are this month’s highlights: Global equities closed the first quarter firmly higher, with Developed Markets and the US leading the charge. Investor sentiment was buoyed by the dovish tone of Central Banks, and the implication interest rates would remain lower for longer. Concerns regarding slowing overall global growth lingered, despite some progress in Sino-US trade talks. The UKs exit from the EU, set to be finalised on the 29th of March, was delayed following multiple rounds of voting and widespread dissent amongst Members of Parliament. This saw some investors turn to safe haven bonds and credit spreads narrowed.
South African cash yielded 57 basis points (bps) for March. The South African Reserve Bank (SARB) kept rates unchanged at its month-end Monetary Policy Committee (MPC) meeting, though the SARB sees significant upside risk.
” Governor Lesetja Kganyago cited increasing concern about global growth, electricity constraints and weak business and consumer sentiment as factors weighing on the forecast.”
Although the SARB has done an admirable job of anchoring expectations at the lower end of the spectrum, high energy prices are exerting cost-push pressure. This is likely to be felt particularly in the April inflation reading, with a volatile rand, stronger oil prices and the realisation of the higher levies and taxes leading to a more than R1 hike in pump-prices. Inflation for February, the latest reading, ticked up by 10 bps to 4.10%.
The ALBI gained 1.28% during March 2019, while inflation linked bonds gave up 0.85 % of year-to-date gains. South African investors were watching ratings agency Moody’s closely for some hint of what the agency may do at its (post market close) month-end meeting. After a surprising and somewhat unsettling delay in its announcement, it elected to maintain South Africa’s sovereign credit rating at investment grade, but on a negative watch. The firm failed to provide a reason for the delay, but South African investors were happy for the reprieve. Despite the considerable concerns surrounding Eskom and the country’s energy crisis, analysts speculate that the agency held back in deference to this being an election year. A downgrade could be seen as an effort to sway the voting populace into a particular direction.
Overall SA bonds offer attractive real yields. Key risks remain in place and are likely to add volatility to the market, these being the deteriorating state of the fiscus; the state owned enterprise(SoE)/Eskom bailout risk and any re-emergence of a risk-off scenario across EMs. Inflation linkers were relatively unchanged during the quarter at attractive pricing, but dipped slightly as demand ticked up in response to a harder inflationary reading.
The Federal Reserve Bank is increasingly dovish, with the Federal Open Market Committee revising its projection for US interest rates lower. Analysts no longer expect a rate hike this year. Similarly, following the release of some softer economic data, the European Central Bank (ECB) has acknowledged that Eurozone growth is perhaps not as robust as it had hoped. German bund yields were over 30 bps lower at quarter-end, falling to below zero for the first time in two years as safe – haven appetite resumed.
“The ECB has indicated that it will not implement any interest rate hikes, and has also implemented a new stimulus package (the Targeted Long-Term Refinancing Operation, TLTRO).”
This sees the ECB extend loans to banks at favourable rates for the next two years. Brexit remained the main influence in the sterling bond markets. The 10-year Gilt yields hit their lowest level in a year due to ongoing uncertainty, providing a 3.6% return in local currency to end off the quarter.
Corporate bonds had a strong quarter, as markets focused on macroeconomic data. Global High Yield bonds also had a strong showing, partly boosted by sustained energy sector increases. Emerging Market debt, despite some geopolitical tension, put in a solid performance, ending the quarter with returns of 6.6%.
South African equities were positive, but lagged global peers. This comes despite a tense lead-up to the May local elections and concerns around SoEs, with Eskom the main focus. Eskom’s unexpected implementation of loadshedding was a major disruptor to business, particularly to SMEs. StatsSA consequently reduced its forecast for 2019 economic growth, and fears of a Moody’s ratings downgrade were exacerbated. The credit ratings agency was set to release its revision on the evening of 29 March, but delayed doing so. South African investors nonetheless were somewhat relieved at the final outcome, as it sees the country retain its investment grade sovereign rating. Business confidence remains at low levels.
“Financials proved the index laggard, with the sub-index closing 4% lower, as banks continue to face stiff competition from new entrants and the SARB kept rates unchanged.”
South African industrials and rand hedges, in a volatile currency environment, enjoyed a positive month. British American Tobacco regained lost ground, registering a hefty 16% gain. Naspers also recovered from the prior month’s jitters, recouping 9% after the announcement of the unbundling. Although precious metals prices softened, resources ticked nicely higher. The substantial gain in diversified miner BHP Billiton led the charge.
On the macroeconomic front, growth prospects were severely dented by the latest Eskom debacle.
“Analysts suggest that the overall fall-out is difficult to quantify, but that recent rounds of loadshedding cost the economy nearly R2 billion per day.”
It is therefore not surprising that National Treasury has dropped its growth forecast for 2019. The latest data shows that business confidence remains depressed: respondent to the Absa Purchasing Managers’ Index (PMI) scaled back their optimism about future business conditions for the second consecutive month. The underlying sub-indices’ movements suggest that demand was weaker in the first quarter of 2019 compare to the fourth quarter of 2018. The deterioration in the data was underpinned by sharp declines in the employment, inventories and business activity sub-indices. The services and supplier performance sub-indices showed some improvement, remaining just above the neutral 50-point mark. Consumers in turn, were steeling themselves against the sizeable fuel price increase. The impact is manifold: consumer appetite and disposable income decline as more of the budget needs to be allocated to transport; the production and input costs tick higher and feed into inflationary pressure. The SWIX gained 1.25% during the month.
South African listed property slid further, with the SAPY (SA Listed Property Index) and ALPI (All Property Index) losing 1.46 % and 1.92%, respectively. The yield to maturity on long-term South African government bonds was also rerated 7 bps lower (ending at 8.99%). Heavyweight property company Growthpoint is often regarded as a bellweather for the general listed property sector. During March, Growthpoint reported DPS growth of only 4.5%, with offices notably dragging on the overall portfolio.
The office sector saw vacancies increase from 8.6% to 10.2%. This is partly a response to the rapid expansion in flexible workspace operators. Flexible trends include co-working arrangements (where one or more companies share office spaces). Such workspaces already make up almost 20% of office take-up in London, New York, Paris and Amsterdam. Local company Redefine has recently partnered with the industry giant WeWork, who are renting six floors of premium office space from the company. WeWork’s entry will no doubt prove unsettling for local players who have already started looking into the growing sector. WeWork’s entry into South Africa will bring on additional, futuristic supply to South African markets, potentially unsettling local players who have started to explore the flexible work space phenomenon. This includes Investec Property’s partnership with workspace specialist Giant Leap to create FutureSpace, Growthpoint’s 50% stake in Workshop 17, and Towers renting out space in its Sunclare building to coworking firm ‘Spaces’.
South African real estate is in a low-growth environment, and market disruptors such as flexible workspace arrangements are adding to the pressure on traditional real estate sectors. The question of land expropriation is not yet settled, and Eskom’s failure to keep the lights on has acted as a further deterrent to international investors.
Global property, on the flipside, had a particularly positive month, with the FTSE EPRA/NAREIT Developed Net Rental Index, gaining 3.22% in USD. In comparable USD terms, most developed markets have outperformed local and EM counterparts. Australia was the best performing developed market (5.59%) and the UK exhibited the lowest total USD return (-1.77%).
Brexit is taking its toll on the UK’s housing and office markets. House prices in England have fallen for the first time in six years, and firms remain wary of investing in new office spaces. This is particularly true in London, and for the financial services industry.
“With considerable uncertainty in global equity and bond markets, the relatively predictable and stable uptick in global property has been most welcome.”
Quarterly earnings results have been in line with expectations, and overall real estate fundamentals remain healthy. The estimated forward Funds Available for Distribution (FAD) for the sector is 4.61%. While listed real estate appears to lean towards the expensive side, however, there are ample opportunities to pick up attractively priced counters in specific sectors and stocks.
Global equities climbed in March, as progress around US-China trade talks was achieved, and the Federal Reserve Bank and European Central Bank stayed dovish on interest rate hikes. Developed markets outperformed the broader Emerging Market group, led mainly by US markets and despite the UK not effecting its much-anticipated Brexit at month-end. The MSCI World posted a 1.31% return, while the MSCI EM yielded only 0.84%. The MSCI BRIC, however, saw a bumper month for Chinese equities (China A onshore equities returned 6.13% and the MSCI China 2.44%), and ticked up 2.51%.
“US equities saw their best first quarter performance since 2009, and the S&P500 ended the month 1.94% higher.”
Macroeconomic data was mixed: US consumer confidence ticked up, even as retail sales declined on a month-on-month basis and the IHS Markit US Composite Purchasing Managers’ Index dipped (although still in expansionary territory at 54.6).
The Fed’s dovish tone set the scene for strong corporate earnings for the quarter, and saw a resurgence in appetite for growth stocks. Tech stocks were a major beneficiary and the sector proved to be the best performer for the month. Optimism around Sino-US trade agreements also boosted equities. At the other end of the spectrum, lingering concerns over the health of the global markets saw defensive sectors such as utilities and real estate also post solid returns. Energy counters were particularly strong, with the price of oil reaching more than USD 60 per barrel.
“European stocks had a third consecutive month of gains, despite a foiled Brexit and mixed macroeconomic data. .”
The STOXX All Europe returned 2% for the month. The ECB indicated that an interest rate hike this year was unlikely, and cut its growth forecasts. With banks’ profitability negatively impacted by lower interest rates, Financials were the hardest hit.
Meanwhile, growing concerns that Eurozone growth was not as robust as previously thought, were underlined by a decline in the Eurozone Composite PMI, in particular Germany’s composite PMI. As the services PMI remained in positive territory in the export-heavy European heavyweight, the dip is attributable to the slowing manufacturing sector, and likely one of the spill-overs of ongoing trade tensions and uncertainty around Brexit.
“UK markets were boosted by energy counters, and returned 3.29% for the month. The first quarter returns (9.49%) have largely erased the losses suffered in the last quarter of 2018.”
Brexit continued to dominate the political agenda and currency markets remained the canary in the coalmine. Sterling peaked at mid-month, as the UK Parliament voted to reject a no-deal exit and sought an extension of Article 50. The UK was originally due to leave the EU on 29 March, but a third vote on Prime Minister Theresa May’s deal took place instead. The Minister’s deal was rejected for the third time, and Sterling weakened significantly. The UK is currently seeking an extension to June 2019, and Theresa May looks set to vacate her position no matter the outcome of subsequent votes. Parliament has made little to no progress in agreeing to a deal.
On the macro economic front, the Bank of England kept interest rates unchanged amidst continued caution on the no-deal scenario. This caution, somewhat perversely, led to an uptick in the UK manufacturing PMI (to 55.1) as UK companies built up stockpiles. Unemployment edged downward and UK consumer sentiment was unchanged (albeit negative at -13 points), with the robust labour market data offsetting Brexit uncertainty.
After a tough start to the year, UK retailers saw some relief, with month-on-month sales ticking up 0.4%, easily beating expectations of a 0.4% decline. The construction sector was hard-hit by Brexit, with the IHS Markit/CIPS UK Construction PMI registering 49.7 and representing the first back-to-back decline since the referendum in 2016.
Japanese equities remained near the flatline, posting a 0.03% decline, amidst pessimistic forecasts for corporate earnings. Uncertainty regarding the strength of global growth, ongoing trade disputes, tensions on the Korean peninsula and a strong yen all weighed on the nikkei. Manufacturing PMI remained in contractionary territory and retail sales growth came in beneath market expectations.
Chinese equities continued to surge ahead, recording their biggest quarterly gain since 2009. Equities were boosted by optimism regarding trade talks, and positive macroeconomic indicators. Industrial production, retail sales and forecast corporate earnings were all buoyant. Manufacturing PMI returned to positive territory at 50.5. The positive sentiment surrounding the increased weighting in the MSCI Emerging Markets Index (to 3.3% from 0.7%) further boosted the Asian giant’s equities.
“China, however, was not the star performer in Emerging Asia: that accolade belongs to India, with the SENSEX registering a 7.29% gain.”
Latin American markets were the EM laggards, dragged down by weakness in Brazil and Chile. The Brazilian market closed near the flatline (-0.18%), despite a strong showing from energy counters. Weak economic data and ongoing political tension (the arrest of ex-president Michel Temer and the unhappiness with proposed pension reform) weighed on sentiment. Conversely, higher oil prices and improved sentiment saw minnow Colombia at the top of the Latin American region.
In terms of sectors, defensive real estate and communication services were the best performing amongst broader Emerging Markets, with technology stocks boosting Asian markets in particular. Industrials and Materials were lower, reflecting uncertainty about global demand in a slowing growth environment.
Equities in Emerging European Markets were mixed, with gains in Russia (+0.48%), Hungary and reformist Greece. Turkey was the regional laggard, as uncertainty ahead of local elections saw the lira weaken further and a pre-emptive sell-off in equities.
African markets were mixed, but the MSCI EFM Africa ex SA dipped 0.62% overall. North African markets were the weaker performers in the market, with previously star-performing Morocco dipping 1.5%, partly reflecting depressed tourism revenue.
Arrivals from Europe and spending by European tourists declined noticeably. Tunisia registered a 3.5% loss. Nigerian equities, too, posted a loss of a similar magnitude, despite improved oil prices. Kenyan markets were the regional leader, posting just under 4% in gains. This uptick is despite the Stanbic Bank Kenya Manufacturing PMI decreasing modestly to 51. The Kenyan Central Bank (KCB) left interest rates unchanged at 9% at its month-end meeting. This reflects the positive perceptions of the country’s macroeconomic stability and is despite the delayed onset of long rains, and its potential impact on agriculture and food security.
Currencies and Commodities
The USD index was 1.2% higher in March, and Emerging Market currencies lost ground against developed peers. Amongst the developed markets, Japan and Switzerland gained modestly (0.5% and 0.3%) while sterling continued to suffer on Brexit tension (-1.7%). Within the Emerging Markets group, the Indian rupee, despite geopolitical tension with Pakistan, put in a solid performance (+2.1%) and Russia’s rouble gained modestly. The Brazilian real, Turkish lira and South African rand extended prior-month losses at -4.2%, -4.1% and -2.2%, respectively.
“The overall GSCI commodity index closed 1.6% higher, boosted by a still resurgent Energy sector.”
The sub index closed 2.5% higher. Livestock and Agricultural commodities were the best performer overall, led by a surge in Lean Hogs and Cotton prices. Precious metals were led lower by Gold (which registered a 1.6% loss).
World Market Indices Performance
Monthly return of major indices
Local Market Indices Performance
Returns of the FTSE/JSE sectors and indices
Monthly Industry Performance
Get the monthly Market Commentary Delivered To Your Inbox