Global equity markets pushed higher in April as the vaccine roll-out gained traction in developed markets, economies reopened and inflation fears subsided.
*31 March to 28 April 2021
On balance, first-quarter earnings across geographies were better than expected as companies’ revenues recovered quicker than anticipated, margins expanded, and earnings received a lift from cleaner balance sheets and better cost containment. Bond yields globally subsided, the dollar weakened, and sentiment was generally positive towards emerging markets.
In South Africa the Johannesburg Stock Exchange (JSE) eked out a positive return in rand terms but advanced in line with global markets on a dollar basis. The rand strengthened amid dollar weakness and a continued push higher in commodity prices supported the value of the country’s export basket. Local bond yields subsided in line with the global trend. The property index continued to recover strongly.
The recovery of the United States (US) economy continued. Gross domestic product (GDP) growth accelerated to 6.4% annualised, driven by a massive 10.7% jump in consumption. This was likely buoyed by the two rounds of stimulus cheques in the quarter. The IHS Markit US Composite Purchasing Managers’ Index (PMI) climbed to 62.2 in April 2021, signalling the fastest pace of private sector activity growth since data collection began in October 2009, supported by quicker increases in services and manufacturing output amid looser Coronavirus (COVID-19) measures and the reopening of many service sector businesses. Retail sales jumped 9.8% month-on-month in March, following a downwardly revised 2.7% fall in February and easily beating market forecasts of a 5.9% gain. Retail sales increased 27.7% year-on-year in the month. The trade deficit widened for the second month to $71.1 billion in February from a revised $67.8 billion in January, slightly above market expectations of a $70.5 billion gap. Imports fell less than exports, with the latter down 2.6% and the former down 0.7%. The goods deficit widened with China (to $30.3 billion) and Canada (to $4 billion) but narrowed with Mexico (to $6.8 billion). The unemployment rate fell to 6% in March from 6.2% in February, the lowest rate in a year and in line with market expectations. The labour force participation rate edged up to a three-month high of 61.5%. The consumer price index rose 2.6% year-on-year in March compared to expectations of a 2.5% increase. A surge in gasoline prices accounted for about half the gain. The Fed left the target range for its federal funds rate unchanged at 0% to 0.25% and said it will continue to purchase bonds at a rate of $120 billion a month despite acknowledging a rise in inflation and the improvement in the economy. As expected, the Fed attributed higher inflation readings to “transitory factors”.
Data in the euro area reflected a slow exit from lockdown conditions but were broadly better than anticipated. The IHS Markit Eurozone Composite PMI rose to 53.7 in April, from 53.2 in March and above market consensus of 52.8. The IHS Markit Eurozone Construction PMI increased to 50.1 in March from 45 in February, pointing to a small expansion in eurozone construction activity, the first since February 2020. Consumer confidence rose by 2.7 points from March to -8.1 in April, the highest level since February 2020 and above market expectations of -10.8. Retail trade fell 2.9% year-on-year in February, easing from a 5.2% fall in January and compared with market expectations of a 5.4% drop. The trade surplus narrowed to €17.7 billion in February 2021 from €23.4 billion in February 2020. Exports fell 5.5% while imports declined 2.7%. The unemployment rate stood at 8.3% in February, above market expectations of 8.1% and up from 7.3% a year earlier. Among the largest euro area economies, the highest jobless rates were recorded in Spain (16.1%), Italy (10.2%) and France (8.0%), while the lowest rates were recorded in the Netherlands (3.6%) and Germany (4.5%). The annual core inflation in the euro area slowed to 0.9% in March from 1.1% in February. The European Central Bank (ECB) left monetary policy unchanged in April, as officials took a wait-and-see approach after last month’s decision to conduct emergency bond purchases at a significantly higher pace over quarter two.
Economic data out of the United Kingdom (UK) were generally better than expected. Britain's GDP shrank by 7.8% year-on-year in February, following a revised 8.5% contraction in January and compared with market expectations of an 8.3% fall. Retail sales increased 7.2% year-on-year in March. It is the biggest increase since October 2016, beating forecasts of growth of 3.5%. This increase reflects the effect of the easing of COVID-19 restrictions on consumer spending. The first stage of easing the nationwide lockdown started in March but stores, pubs and restaurants opened only in April. The IHS Markit/CIPS UK Composite PMI climbed to 60.0 in April, from 56.4 in March and well above market forecasts of 58.2. New business volumes increased the most for nearly seven years and employment growth was the highest since August 2017. Business confidence remained close to March's record high. The IHS Markit/CIPS UK Construction PMI jumped to 61.7 in March, from 53.3 in February and above market expectations of 54.6. The UK trade deficit rose to £7.1 billion in February from an upwardly revised £3.4 billion in January. It was the largest monthly trade shortfall since March 2019. Imports advanced 12.9% while exports increased at a slower 5.4%. The UK unemployment rate fell to 4.9% in the three months to February, below market consensus of 5.1%, supported by the government's furlough scheme. Core consumer prices increased 1.10% in March, in line with expectations.
Economic data from Japan showed a broad improvement in activity. The au Jibun Bank Japan Composite PMI rose to 50.2 in April from 49.9 in March. This was the first expansion in the private sector since January 2020, as the economy gradually recovered from the depths of the COVID-19 pandemic. Retail sales in Japan rose by 5.2% year-on-year in March, following a 1.5% fall in February and well ahead of market expectations of a 4.7% fall. Japan's trade surplus soared to ¥663.72 billion in March 2021 from ¥7.49 billion in March 2020, easily exceeding market expectations of a ¥490 billion surplus. Exports jumped 16.1% year-on-year while imports grew by 5.7%. Core consumer prices in Japan decreased 0.10% year-on-year in March, in line with expectations. The Bank of Japan left its key short-term interest rate unchanged at -0.1% and maintained the target for the 10-year Japanese government bond yield at around 0% during its April meeting, as widely expected. The central bank reaffirmed that it would not hesitate to take additional easing measures if necessary.
Economic data out of China were mixed relative to estimates but signalled a continued improvement in activity. The Chinese economy advanced 18.3% year-on-year in quarter one of 2021, accelerating sharply from a 6.5% growth in quarter four of 2020 and compared with market consensus of 19%. The latest reading reflected a low comparison base in 2020 when activity plunged due to the COVID-19 shocks. For 2021, China expects the economy to grow by more than 6%. The Caixin China General Composite PMI increased to 53.1 in March from 51.7 in February. This was the highest reading since December last year, driven by a sharper rise in services activity, as manufacturing production growth was fractionally slower than that seen in February. China's trade surplus narrowed to $13.8 billion in March 2021, from $20.0 billion in March 2020 and far below market expectations of $52.05 billion, amid an improving global demand and higher commodity prices. Exports soared 30.6% and imports jumped 38.1%. The unemployment rate decreased to 5.30% in March from 5.50% in February. The consumer price index in China rose by 0.4% year-on-year in March, after a 0.2% drop in February and compared with market consensus of a 0.3% gain. On a monthly basis, consumer prices went down 0.5% in March, the first decline in four months, following a 0.6% rise in February.
In South Africa most data points were more upbeat. The composite leading business cycle indicator advanced 2% in February from January, the most since last October. Increases in four of the ten available components outweighed decreases in the remaining six components. The largest positive contributions came from more building plans approvals and job advertisements. In February, the value of building plans passed surged 21.9% year-on-year The IHS market PMI rose to 50.3 in March from 50.2 a month earlier, pointing to a marginal improvement in operating conditions and the sixth increase in as many months. Absa manufacturing PMI also rose to 57.4 in March. The latest reading pointed to the third straight month of expansion in manufacturing activity and was at a faster pace. February retail trade unexpectedly rose 2.3% year-on-year, much better than market expectations of a 1.8% fall. It was the first gain in retail activity since March of last year. On a seasonally adjusted monthly basis, retail sales surged 6.9%, the biggest increase in nine months. Mining production in February increased 0.8% year-on-year. It was the first month of growth in mining activity since February last year. The largest positive contributions came from iron ore, manganese ore and other non-metallic minerals. On a seasonally adjusted monthly basis mining production rose 3.8%. Manufacturing production however, fell 2.1% in February, worse than market expectations of a 0.4% fall. The trade surplus rose to R28.96 billion in February, also beating expectations of a R19.5 billion surplus. Exports jumped 16.5%, while imports advanced at a much slower 1.6%. The annual inflation rate rose to 3.2% in March from 2.9% in February, in line with expectations. Main upward pressure came from the prices of food and non-alcoholic beverages, transport and health. Core inflation increased to 2.5%. Producer prices rose 5.2% year-on-year in March, up from 4% in February and above market expectations of 4.7%. It was the highest rate since June 2019, mainly pushed higher by food, beverages, and tobacco. There were no central bank meetings held during the month of April. The next South African Reserve Bank meeting is scheduled for 20 May.
Market outlook in a nutshell
- We remain constructive on emerging markets outside of China amid potential high growth rates in corporate earnings.
- Global growth is rebounding. A more material recovery is expected this year as precautionary savings unwind, and as economic activity recovers off a low base.
- We continue to believe that the dollar will depreciate amid its counter-cyclical nature with the reflationary growth cycle.
- The vaccine roll-out is expected to be a positive boost to equity markets.
- Monetary policy has become more supportive and is expected to remain accommodative in 2021. Central banks will likely continue to add significant liquidity and balance sheet support to their economies.
- Inflation is expected to rebound in 2021, although will likely struggle to remain near target levels on a sustainable basis for a prolonged period.
- Commodities to broadly benefit from a pickup in global demand.
- Yield curves in many developed economies will likely remain flat or gradually rise, diminishing the capital gain return in bonds as economic growth and inflation accelerate; hence our underweight position at this stage. We do, however, believe that many central banks will continue to intervene in the bond market and supress the pace of yield curve steepening in many of these developed economies.
- Global equities have more investment merit than global bonds.
- Economic growth is expected to recover in 2021 from a low base. The favourable global macroeconomic backdrop should benefit SA. The roll-out of vaccines will be a key risk factor. Our base case has a third wave of infections, and we expect the vaccination programme to be completed only by the end of 2022.
- Policymakers and the private sector will continue to muddle through the complexity of implementing meaningful structural reform. Without these reforms overall GDP will remain low by historical standards.
- Fiscal pressures continue to be exacerbated by financial difficulties at state-owned enterprises, particularly Eskom.
- Slightly higher inflation, stronger growth and slightly tighter global conditions should result in a 0.25% repo hike by the second half of 2022.
- We expect the rand to continue enjoying some temporary relief before depreciating over the medium term, within a wide trading range.
- Despite an expected near-term improvement in the jobs market as the economy reopens, unemployment is expected to consistently trend higher and household income to remain weak.
- Successful implementation of growth-enhancing economic and fiscal reforms represents an upside risk to our baseline view.