The South African All Share Index managed to recover some of its recent losses and re-gained 5.4% in April, on the back of international investors’ increased risk appetite and a weaker rand. Nevertheless, there are still three geopolitical uncertainties looming that could upset the markets going forward: –
Locally, the South African Reserve Bank (SARB) Governor, Lesetja Kganyago, reiterated that the SARB would only react to a weaker rand by increasing interest rates if it influences the inflation trajectory. However, the SA economy is screaming out for a cut in rates to infuse some substance to business confidence relating to Ramaphoria. Globally, prices are rising and central banks are tightening monetary policy which could result in the repatriation of cash back to the developed world and away from emerging markets like South Africa.
The rand has lost significant ground in April, weakening by 4.8% over the month and essentially wiping out all the gains that we had seen for the YTD. The rand is currently 0.22% weaker against the dollar versus the end of last year. Long-term seasonality trends suggest that the rand will likely remain under pressure in May, and then recover in the following months.
Fortunately, the South African Consumer Price Index (CPI) was recorded at 3.8% for March from 4% previously, better than the market consensus of 4.1%. However, higher oil prices and a weaker rand could see this rebound in the short term.
The ABSA Manufacturing PMI for South Africa rose to 50.9 in April of 2018 from 46.9 in the previous month. The reading pointed to the second month of expansion since May of 2017, as new sales orders recovered from a sharp decline in March 2018.
South Africa Manufacturing PMI
Source: Trading Economics
European markets outperformed in April, with the Euro Stoxx 50 gaining 5.8% versus US markets’ 0.4% gain (S&P500). High-frequency economic data in the Eurozone remains upbeat, with retail sales growth improving, and industrial activity growing at a modest pace while confidence metrics continue to reflect better sentiment in the economy.
The US labour market continued to tighten in March, as the pool of available labour declined at a faster pace, resulting in higher average hourly earnings. Retail sales rebounded sharply. While industrial activity in the US remained resilient, the pace of growth was hampered by trade-war concerns as President Trump announced sharp tariff increases for steel and aluminium imports.
The market expects no change to policy rates in the US this month, but there is a 92% probability of a hike in June 2018. The Fed is expected to maintain a hawkish policy stance, with some policymakers debating the need to raise interest rates by more than what is projected in its dot plot. Similarly, the ECB has also indicated that it will end its asset purchase programme soon, while the Bank of England will probably hike rates in May to curb inflation.
The IMF updated its World Economic Outlook report in April 2018, and kept the global growth forecast unchanged at 3.9% (from 3.8% achieved in 2017) over the next two years, but warned that growth will likely weaken to 3.7% thereafter. Advanced economies are expected to grow above potential in 2018 and 2019 while growth in EM’s is also expected to rise. However, the IMF has noted that it expects a slowdown beyond 2019.