Politics dominate headlines in May 2024, and South Africa’s elections result in a pivotal shift in the political landscape.
For the first time, South Africa is facing a coalition Government at National level as voters voiced their frustrations with the ANC, and it’s now up to party leaders to put their country first as negotiations for the way forward begin. In market news, the macro environment remains focused on the inflation trajectory and what that might do to rate cut expectations.
Introduction
May has been a stronger month for international markets as a number of the fears around stagflation were dismissed. Locally May was a big month for South Africa as national elections have resulted in a shift in the political landscape. On the election theme, in the UK, Prime Minister Rishi Sunak has called for an election on the 4th of July which is earlier than most have expected. Donald Trump was found guilty in his hush money trial which could alter the election outlook in the US although it is expected he will appeal.
While politics has been dominating the headlines the macro environment remains focused on the inflation trajectory and what that might do to rate cut expectations. In a fairly dramatic shift from the beginning of the year it is now expected that the ECB and BOE will start cutting rates before the Fed. While many Fed speakers remain hawkish a cooler than expected April inflation print allowed for rate cut expectations to be brought forward to September. Although, this continues to shift as additional macro data comes through and the bad news is good news thinking appears to be back.
Results season is largely at an end with the final stand out in May once again being Nvidia, which managed to beat the lofty expectations of the market and guide ahead of what analysts expected. The insatiable demand for Nvidia chips remains in the data centre category as the hyperscalers (Amazon, Microsoft and Google) are clearly investing and putting serious money behind AI.
In South Africa it has been a historic month with the ANC losing their majority in the national election for the first time in the post-apartheid era. Not only did they lose the majority but they saw a significant decline in support nationally as well as in a number of key regions. The biggest surprise that most analysts didn’t predict was the strength of the MK party which was only launched by Jacob Zuma in December 2023. Not only have they achieved significant strength in KZN but nationally they reached 15%. Their manifesto reflects some extreme populist ideas such as nationalizing of the banks and mines and they are fundamentally against the constitution. Whether their support is aligned to this thinking or the party benefitted from Zuma’s political capital is unknown but either way the MK party is going to have an impact on the South African landscape going forward. We now move into a time of uncertainty as there will be a number of discussions and ongoing negotiations as we move towards a coalition. Markets won’t like this uncertainty and we have already seen an uptick in volatility. The best outcome from a market perspective would be a coalition between the ANC and DA which would be viewed as a Government of national unity.
Macro Environment
Following the sticky inflation seen at the start of the year the market took relief as the disinflationary trend continued with April readings released in May. The Fed’s preferred measure of inflation (PCE) came out in line with the market expectations of 0.26% MoM and 2.7% YoY. The core PCE measure was similar coming in at 0.25% MoM and 2.8% YoY. Although this remains above the target of 2% it is below the prior month’s rise of 0.33%. Economists are of the view we need several months of the core PCE MoM reading to be between 0.2% and 0.3% in order to keep a September rate cut in play. Q1 second preliminary read of Q1 GDP was revised down to 1.3% QoQ which is lower than the 1.6% prior. This was taken positively by the markets as the bad news is good news thought train meant that the slow down was in line with tightening conditions and would allow for rate cuts.
The South African election is largely being seen as a watershed moment in South African politics as voters voiced their frustrations with the ANC majority rule. The country is now faced with a coalition Government at the National level for the first time. President Ramaphosa spoke at the IEC results announcement where he emphasized it is time for the party leaders to put the country first and find common ground in forming the new Government. In addition, he supported the IEC announcement that election was free and fair. There are already a number of discussions underway with parties putting forward their negotiating teams to see where they can find an agreement. The manifesto’s of the parties are fairly divergent so it will be a matter of negotiators putting the people of the country first in order to reach common ground. Markets are jittery about the potential outcomes as there are a few scenarios that would not be seen as market friendly and would likely scare away foreign investors. With the ANC getting a far lower percentage than was anticipated the option of working with smaller parties is largely off the table so the main discussions are going to be between the bigger parties namely; ANC, DA, MK and EFF.
The chart below from Daily Maverick highlights the changes in seats for 2024 which reflects the significant shift. Whatever the outcome the next few weeks are going to have a large impact on the future of South Africa and we will all be watching closely not only from a markets perspective but also on future policy shifts that will shape investment appetite.
Asset Allocation
Our offshore asset allocation remains unchanged as we remain comfortable with our underlying companies based on their recent results and outlook. Our bond positions are performing well despite the volatility and the Structured Notes position bring a yield underpin to the portfolio. Locally we remain with our Rand hedge bias especially as the election results impact is being digested by markets and we expecting a period of uncertainty. Should a positive coalition outcome be achieved we could assess upweighting SA Inc stocks but we think it is a too soon for that.
Market Performance
May was a good month for offshore markets while the local market saw quite a bit of volatility due to elections. During the month of May, the S&P500 ended up 4.8%. The MSCI World index was up 3.83% for the month and the JSE saw a small positive return of 0.83%. As per chart below the YTD performance of the JSE is down 0.25% (in ZAR), while the S&P500 is up 10.64% and the World index is up 10.04% (in USD), respectively.
Bonds
Bonds have seen quite a bit of volatility in May as the market seeks to position for anticipated rate cuts and the uptake in some of the Treasury auctions was lower than expected. This has seen the yield curve move around quite a bit. We still prefer Investment Grade bonds and within that the highest credit quality. We have been focusing on positioning on the short end of the curve for clients who want to lock in these attractive yields and just hold to maturity. For clients who have appetite for some duration risk we have taken advantage of movement around the 10 year point of the curve as it has been fairly volatile and presented some attractive yields which of a long term basis could result in decent capital uplift as we see the yield curve normalize. The below chart highlights some of the movement in the 10 year.
Equities
As earnings season closes out in general we once again saw a number of technology companies perform very well with both Google and Nvidia being stand outs. On the consumer side we saw a bit of a divergence with Walmart producing results that the market liked whereas Target was punished for missing the mark. There is no doubt while the consumer remains resilient they are looking to stretch their dollars a bit further and so price sensitivity is picking up and this makes product mix and price points critical for retailers. Overall the earnings season could be viewed as strong with the S&P500 reporting growth in earnings of 6% which is the highest YoY growth since Q1 2022. 78% of S&P 500 companies exceeded EPS estimates which is just above the 5-year average of 77%. The charts below from Statista illustrates the incredible growth Nvidia has experienced specifically in the Data Centre segment as they benefit from being the leaders of AI.
Conclusion
May saw a strong recovery in offshore markets and a pivotal shift in South Africa’s political landscape. While there may be some volatility in the short term it is important to step back from the noise and focus on long term fundamentals. We are comfortable that both our local and offshore portfolios are well positioned for the long term and will ride out any short term volatility. The world remains very uncertain and the landscape is ever shifting so please feel free to reach out to the team should you wish to discuss any of these matters and the outlook for your portfolio.
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