Monthly Market Update

Monthly Market Update – May 2019

– Rich Mashayanyika, Director Cornerstone Asset Management

May 2019 was a busy month for markets, both locally and globally. Markets were in the red across the globe, with geopolitical issues being one of the major contributors to the downdraft. The “Trump” effect reared its nasty head once again with the US increasing tariffs on $200 billion worth of Chinese imports and threatening to further increase tariffs by another $300 billion worth of Chinese goods. The International Monetary Fund (IMF) has cautioned that these increase in tariffs would reduce global growth by 30bps in the short term.[1]  

On the domestic front, the ANC won the May 8 elections by 57.5% which caused a welcome boost to investor confidence as investors are expecting president Cyril Ramaphosa to implement rational and stable economic reforms and policy certainty. This brief uptick in investor confidence is expected to have a positive effect on economic growth and fiscal outcomes for SA.

Despite the recent brief election euphoria, investor confidence continues to face headwinds as SA marked the sharpest quarterly GDP decline in 10 years. South Africa’s economy contracted 3.20% in the first quarter of 2019, following 1.40% growth in the previous quarter, missing market expectations of a 1.7% contraction.

Implications of the news

  • SA GDP

The economy contracted sharply (the most in over a decade) in the first quarter of 2019.  Real GDP contracted by a seasonally adjusted and annualised – 3,2% quarter on quarter.

This was way below the market expectation of -1,7%. This severe contraction was most notably caused by the heavy burden of Eskom’s power cuts which have had, and will continue to have, adverse effects across many different sectors of the economy.

Source: Stats SA; Cornerstone Asset Management

The breakdown in GDP figures shows that SA’s economic weakness was widespread with the sharpest declines recorded in the agriculture, the energy-intensive and export-orientated mining and manufacturing sectors as well as electricity, gas and water[2]. Domestic trade, accommodation and catering were also hard hit as load-shedding, election anxiety, higher unemployment and rising cost pressures hurt household confidence, income and spending, while the slump in construction activity intensified[3].

The outlook for the remainder of 2019 also remains subdued. In line with recent results of research published by Nedbank’s economist’s, the SA economy is expected to perform slightly better in the quarters ahead. The improvement in electricity supply in recent weeks (long may it continue!) should support modest recoveries in mining and manufacturing off the first quarter’s low base[4].

The SA GDP figures reflect the economy’s continued vulnerability to infrastructure constraints, adverse turns in the global business cycle, rising domestic cost pressures and fading confidence.

Given that most of these factors are likely to persist for some time, growth prospects will probably remain subdued.  On the back of these factors, the Reserve Bank of South Africa (SARB) has recently cut the country’s 2019 GDP growth outlook to 1.0% from a previous 1.3%. The forecast for 2020 and 2021 remains unchanged at 1.8% and 2.0%, respectively[5].

Trade tensions

Following the US`s increased tariffs on Chinese goods, the Chinese have retaliated in a way that could hurt global markets and further damage ties between the world’s two biggest economies. The deepening trade battle between China and the US have already resulted in markets tanking in May.

The pain of a trade war will always extend beyond both sides (China and the USA). The impact will always have a contagion effect considering the global integration of the supply chain. This means the damage of escalating tariffs will be felt globally, reducing consumer demand and further harming U.S. exporters.

Global investors have few places to hide, with markets reacting negatively to trade tensions with all major indices posting negative returns both in rand and USD terms.

Source: Morningstar; Cornerstone Asset Management

Markets During the Month

  • Local equity market (as measured by the JSE All Share Index) followed the global markets lower, down -4.8% in May 2019, as the trade war between the US and China continued to crash markets.
  • Global equities were down -5.8% for the month.
  • Listed property (SAPY) declined -0.9% as the sector continue to face headwinds of lower distribution growth on the back of poor economic conditions locally, over supply of space and increasing vacant spaces especially in office and retail sectors.
  • Bond index (ALBI) ended the month up +0,6%, supported by domestic events in the form of a peaceful election and the appointment of a new Cabinet.
  • Cash posted a modest +0.6% for the month.

Source: Cornerstone Asset Management; Morningstar

The rand weakened against all major currencies, down:

  • 1.8% against the US dollar
  • 0.4% against the British Pound
  • 1.3% against the Euro

While risk sentiment remained downbeat as a result of geopolitical tensions, a key reason for the rand weakness stemmed from a technical rebalancing of the MSCI EM equity index, which increased the weight of Chinese A shares in the index, reducing SA’s weight and necessitating considerable outflows from index-tracking funds[6].

In summary

The IMF has warned that the US-China trade war has escalated to a level which can notably affect global growth. The pain of a trade war will always extend beyond China and the USA. While Trump remains adamant on his stance on tariffs, the Chinese have already retaliated. Considering the global integration of the consumer supply chain, the “contagion effect” caused a rout in global market returns in May.  All major indices posting negative returns both in rand and USD terms. Locally, the -3,2% first quarter GDP has increased pressure on the President as he tries to implement economic reforms for a better South Africa. However, we expect economic recovery to be a gradual process considering the damage which has already been caused over the past 9 years.


[1] https://www.nedbank.co.za/content/dam/nedbank-crp/reports/MonthyInsights/2019/MonthlyInsights_190603.pdf

[2] https://www.nedbank.co.za/content/dam/nedbank/site-assets/AboutUs/Economics_Unit/Research/Economic%20Commentary/GDP%20Q1%202019.pdf

[3] https://www.nedbank.co.za/content/dam/nedbank/site-assets/AboutUs/Economics_Unit/Research/Economic%20Commentary/GDP%20Q1%202019.pdf

[4] https://www.nedbank.co.za/content/dam/nedbank/site-assets/AboutUs/Economics_Unit/Research/Economic%20Commentary/GDP%20Q1%202019.pdf

[5] https://tradingeconomics.com/south-africa/interest-rate

[6] https://www.nedbank.co.za/content/dam/nedbank-crp/reports/MonthyInsights/2019/MonthlyInsights_190603.pdf

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