Global Market

Notwithstanding the focus on US Interest Rates, Trump’s Tariffs and Brexit, the MSCI World Index returned +1% in April, bringing the MSCI World Index return for the year to -0.3%. Emerging markets were somewhat more vulnerable to the impact of these factors, losing 0.6% for the month.

Ten Year US Treasury Yield Reaches 3%!

In April, the ten-year US treasury yield reached 3% – a level considered to begin attracting investors out of equity markets and into bonds. Notwithstanding the concern around this, equity markets seemingly shrugged off the move, as European and Japanese shares showed strong returns in April, and the US equity market remained flat.

The speed and extent of increases in US interest rates is a key concern for investors and any surprises are likely to impact equity markets. The President of the New York Fed, William Dudley recently confirmed expectations saying that “Three or four further interest rate hikes seems like a reasonable expectation this year – as long as inflation is relatively low. If inflation were to go above 2 percent by an appreciable margin, then I think the gradual path might have to be altered.” Factors that raise the possibility of higher than expected inflation will continue to concern investors, and whilst there are many sources of concern, one such factor is the resurgent oil price.

Oil Price Rallies to $75

The recovery in the oil price, which began in January 2016 when the price reached a low of $28.94, continued in April, as it rose 7% to $75.17. This is its highest level since November 2014. This recovery follows coordinated production cuts for 16 months, led by the Organisation of Petroleum Exporting Countries and Russia. These cuts are expected to continue into 2019. Furthermore, the risk of geopolitical factors (Syria/Iran) impacting supply have supported the rally. Whilst investors worry that the increase in the oil price will trigger US inflation and a deterioration in consumer sentiment (effectively slowing down economic growth), the nature of the current price rise appears to have not seen these concerns materialise yet.

Tariff Talk Rumbles On

Donald Trump continued to throw trade grenades via twitter last month, keeping markets on edge. In the meantime, the IMF reinforced investor concerns in their April 2018 World Economic Outlook report focussing on the downside risks to world growth should there be a meaningful increase in global trade protection. This theme will continue to rumble on, as China and the US enter a first round of trade discussions to resolve the matter.

US Corporate Earnings Remain Strong

US companies have begun reporting their earnings for the first quarter of 2018. These reporting periods are important as they are a window into the strength of the global economy. Of the companies in the S&P 500 index, which have so far reported, 80% have beaten consensus forecast. This is good news and has assisted equity markets in countering the higher interest rates and trade talk discussed above. Clearly Trump’s substantial cuts in company tax and windfall earnings in the oil industry have also assisted.

South African Market

For those who track portfolio returns monthly, 2018 has been a rollercoaster! In the four months from January to April, the All Share Index has returned + 0.1%; – 2.0%; – 4.2% and +5.4% respectively. However, in aggregate, the four-month period has returned – 0.9%. The lesson? Short term volatility creates unnecessary “noise” – stay focussed on the long-term objective!

Why Was the JSE Up +5.4% in April?

The continued positive outlook for global growth; a weaker Rand; and growing local positive consumer sentiment, all combined to deliver strong rallies in resource shares (+9%), property shares (+8%) and industrial shares (+ 5%) in April.

The Rand Effect on Offshore Exposure

In the wake of Cyril Ramaphosa’s appointment as State President, the Rand reached a three-year high of R11.55 to the US Dollar on 26 February 2018. This Rand strength resulted in the short-term underperformance of Rand denominated portfolios with offshore exposure, however April brought some light relief as the currency weakened 5.2% to R12.46. The Rand is now trading closer to its long term fair value as measured by Purchasing Power Parity.

Foreign currency exposure can add substantially to the volatility of a portfolio’s returns in the short term, however when viewed over the longer term the impact is much less extreme. Looking at the past five years for instance, the Rand has steadily weakened by 5.1% per annum, however during that same 5-year period, the Rand has weakened as much as 50% and strengthened as much as 25%. Such extreme moves can feel very good or bad when looking at a portfolio’s returns quarter on quarter, however when viewed over the longer term, the impact is in fact, much less extreme.

This month’s Rand weakness also supported the strong returns of the All Share Index, by boosting the rand hedge shares on the JSE.

SA Property Index Bounces

Following a -20% return in the property index for the first quarter of 2018, the sector rebounded with a + 7.7% return in April. 40% of the SA Property Index is comprised of offshore exposure, so the Rand weakness assisted the rally, however a recovery in the shares of the Resilient group of properties which also makes up 40% of the Index was the main contributor. This improvement has assisted Income and Stable Funds with property exposure to regain some of their recently lost ground.

The Ramaphosa Effect Continues to Boost Confidence

Following last month’s fastest ever rise in the Bureau for Economic Research (BER) Business Confidence Index, the BER reported another significant improvement in April, as the FNB/BER Consumer Confidence Index touched an all-time high in the first quarter of 2018. In support of this survey’s findings, the latest retail sales growth figures reported in April showed that retail sales were in fact 4.5% higher in February 2018 as measured against February 2017. Although we have yet to see what Cyril Ramaphosa can deliver, expectations appear to be running high.

Compiled by Mike Moore, Wealth Manager