It was another difficult month for risk assets with only the Nasdaq pulling up US markets. The momentum in tech stocks (or anything related to AI) is still going strong, but everything else is feeling the pressure of high inflation, rising rates and economies getting closer and closer to recessionary territory. Global indices were negative in USD terms with the MSCI ACWI dropping -1.1% and the MSCI EM Index returning -1.7%. The global bond market was also not too happy trading -2.2% for the month of May. These facts coupled with the lifting of the US debt ceiling are making the FED’s job even more difficult, with the market now pricing in another 25bps hike after the next meeting. This is also playing into USD strength, even after it looked like it might start the month off on the back foot. But the main contender in global markets was the Nikkei, which continued its strong run of late. Questions around the continuation of the trend are surfacing, but most economic data coming out of Japan is looking encouraging.
Unfortunately, the South African trend is also continuing. Both our equity and bond markets took a hiding after the news of the possible sale of arms to Russia. On top of loadshedding, grey-listing and all the other problems, we are now facing the threat of possible US sanctions. ETM Analytics had a good piece in its insights pack on the 1st of June 2023 that sums up the local situation well:
It is unfortunate that the normal fundamentals that might drive ZAR cannot overcome the tsunami of negative news that continues to flow. SA’s position on Russia continues to dog markets, and the government will not back down on its “non-aligned” position that looks more aligned to Russia than not. Investors remain concerned that SA is walking a dangerous road and taking unnecessary risks that may attract foreign sanctions and plunge SA into a deep economic crisis. No amount of undervaluation, higher interest rates and improved terms of trade will offset what investors believe are depreciative risks to the ZAR, in line with the SARB’s comments. Add to that the contagion effects of the fall in the TRY following Erdogan’s victory, and EM sentiment is fragile. Conspiracy theories are running wild: the central bank did what it could to prevent the plunge from unfolding shortly before the elections but can no longer sustain the pressure from foreign selling. As global liquidity conditions tighten up and investors become more judicious in where they place their funds, riskier investment jurisdictions will be the first to be marginalised. SA fits the description and has the liquidity to allow for active trading and negative speculation. It remains a proxy for negative EM sentiment and a hedge against financial market stress elsewhere, implying that it remains vulnerable, especially as the news flow remains overwhelmingly negative.
Because of the bad news and negative sentiment, the ZAR had a hard tumble, ending the month 7% weaker against the USD. This means that the ZAR has lost a cumulative 15% year-to-date. This also played into the bond and equity markets, as foreign investors rushed out of anything ZAR-based. The FTSE/JSE All Share Index dropped -3.9%, with Financials (-7.9%) and Property (-5.3%) being the most impactful.
The portfolios performed well over the month, being quite conservatively positioned. We were underweight risk assets overall and focused our bond exposure (both offshore and locally, where applicable) on short- to medium-term duration. This played out well, especially in the South African context. We continue this exposure into the month of June and remain cautious within our portfolios and funds.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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