Global equity markets faced headwinds, exemplified by the MSCI World Index’s substantial decline of -3.71% by month-end, reflecting pervasive risk aversion among investors. Notably, US equities, serving as a bellwether for global markets, faltered amid concerns surrounding inflationary pressures with the S&P 500 index ending the month down by -4.09%.
The US inflationary backdrop remained a focal point for investors, as evidenced by the uptick in the consumer price index (CPI) by 0.4% month-on-month, driving annual inflation to 3.5%. The Federal Reserve’s preferred inflation gauge, the personal consumption expenditure, similarly ascended to 2.7% in March. Investor sentiment regarding Federal Reserve monetary policy adjustments evolved, with expectations for rate cuts in 2024 diminishing from earlier projections. The likelihood of a June rate cut waned, and forecasts for the number of rate cuts dwindled from around six at the year’s outset to merely one or two. Fixed income markets bore the brunt of recalibrated rate expectations, resulting in a notable shift in yield dynamics. In April alone, 2-year Treasury yields surged by 40 basis points (bps) to 5.0%, while 10-year Treasury yields rose by 47 bps to 4.7%, highlighting the market’s sensitivity to monetary policy signals.
Commodity markets experienced notable traction amidst escalating geopolitical tensions and resilient global demand dynamics. The Bloomberg Commodities Index recorded a robust 2.7% increase, emerging as the top-performing major asset class for the month. Rising energy prices, coupled with reduced interest rate sensitivity, buoyed the value segment of the equity market, which outpaced the growth-oriented counterparts on a relative basis.
Chinese equities emerged as a bright spot in April, outperforming developed markets amidst favourable economic indicators. China’s GDP growth of 5.3% exceeded expectations, supported by an expansionary manufacturing PMI, and improved export growth. However, indicators such as retail sales and industrial production trailed consensus estimates, signalling subdued consumption sentiment and tepid activity in the housing market.
A noteworthy development in the Chinese housing market ensued following the Politburo meeting, with the government signalling measures to alleviate existing housing inventory and optimize new supply. This initiative aims to address challenges in lower-tier cities marked by oversupply and weakening demand, offering a potential catalyst for market stabilization.
In our local market, marginal gains were observed in the All Share Index (+2.95%), albeit against a backdrop of lingering concerns surrounding energy security and infrastructural challenges. Heightened apprehension surrounding the forthcoming general election, particularly among offshore investors, underscored prevailing sentiment fragility. Despite the South African Reserve Bank’s decision to maintain its key repo rate at 8.25% in March, the ZAR appreciated against the USD. Inflationary pressures persist, with the annual CPI rate for March 2024 at 5.3%, down marginally from 5.6% in February. The SARB anticipates headline inflation to reach 4.5% by the close of 2025.
Political uncertainties surrounding the impending general elections in May cast a shadow over investor sentiment, accentuating the challenges of navigating the domestic investment landscape. Survey data suggesting potential erosion in support for the ANC and the likelihood of new political alliances heightened concerns over policy unpredictability, contributing to heightened volatility and risk considerations.
In summary, our portfolios and funds were neutrally allocated to risk assets throughout the month, although more tilted toward developed market equities versus emerging markets. Although this impacted the portfolios negatively over the last month, we continue to hold the view that diversification is needed and that a catalyst to go more aggressively into emerging market assets is yet to present itself. We benefitted from our allocation to South African risk assets (on a relative basis) and continue with our neutral stance on risk assets going into the election month.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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