May 10, 2021
Every major asset class tracked higher in April, while a whirlwind earnings season saw many companies deliver blowout results. At the time of writing, 87.1% of the 300+ firms that had reported results had beaten analyst earnings expectations, relative to the historical average of c.65%. Though the mega-cap darlings of Wall Street delivered blockbuster results in Q1, the buzz quickly fizzled; with investors not quite sure how much of the good news was already baked into share prices, and headwinds emerging such as the hotly debated return of inflation and the global chip drought (which affects many industries), which could be a wet blanket for the market going forward.
Overall, developed market stocks (MSCI World Index) closed 4.7% higher, ahead of their emerging market peers (MSCI Emerging Markets Index) which posted gains of +2.5%. Regionally, US equities (S&P 500 Index, +5.3%) hit record highs in April, with the benchmark posting a third straight month of gains and its best month since November 2020 as investors took confidence in the economic recovery and return of profitability since the advent of COVID. Bulls also led the charge across the Atlantic, supported by a pick-up in economic data and vaccinations, and a reaffirmation of support from European and US monetary authorities, while record earnings and a general buoyancy in market sentiment provided further impetus. The pan-continental Euro Stoxx 600 Index hit all-time highs during the month and closed 4.3% higher, bringing its year-to-date total return to +9.5%. In Asia, the Japanese Topix fell 1.8% on the back of some undercooked earnings and growing concern over a rise in COVID infections. Elsewhere, mainland China’s CSI 300 Index ended up 2.8% amid a strong earnings season, but Beijing’s crackdown on tech, liquidity concerns, and weaker manufacturing and services data weighed on market sentiment.
Bond markets found some reprieve in April, with the Barclays Bloomberg Global Aggregate Bond Index recording its first positive month this year, up 1.3%. European yields rose over the period, while the benchmark US 10-year Treasury yield edged lower (yields rise as prices fall) to end the month at 1.632% as US Federal Reserve (Fed) Chair Jerome Powell reiterated that easy money will remain with us for the foreseeable future.
All returns are quoted in US dollars.
US economic activity has picked up in recent months on the back of rapid vaccinations and a gradual easing of restrictions on businesses, while fiscal stimulus has turbo-charged consumer spending. Indeed, April’s consumer spending metric was the highest reading since March 2020 on the back of growing belief in a sustained trend higher in employment and household incomes (the latter posting the biggest jump in March since 1946), supported by federal spending and inoculations. These readings point to a potential double-digit expansion of the US economy in Q2. Q1 growth advanced by an annualised 6.4%, following 4.3% the previous quarter, marginally ahead of consensus expectations of 6.1%. CPI inflation rose to 2.6% in March 2021, from 1.7% in February, while the Fed’s preferred inflation measure, the personal consumption expenditures index, came in at 2.3%. The Fed’s Federal Open Market Committee noted that the pick-up in inflation was by and large due to “transitory factors” while also highlighting base effects which it expects to “disappear in a few months”. The Fed did, however, provide a more upbeat outlook for the US economy (which should pull through in upwardly revised growth forecasts in June), but Fed Chair Powell reiterated that the bank is in no rush to normalise monetary policy and intends to provide sufficient warning ahead of any move in that direction.
April was a busy month on the region’s economic calendar. The eurozone entered a double-dip recession in the first three months of the year as a third wave of COVID infections and lockdown restrictions continued to weigh on the area’s economy. GDP contracted 0.6% quarter on quarter in Q1, lagging other major economies, which are at a more advanced stage in their inoculations and reopening. That said, vaccination efforts have gathered pace across the region, and should lay the groundwork for a strong bounce back in the second half of the year. The bloc’s largest economy, Germany, took the biggest blow, shrinking 1.7% in Q1 owing to a rapid tightening in restrictions, while France exceeded economists’ expectations with a quarterly expansion of 0.4% as its government delayed the reintroduction of tighter lockdown measures. The manufacturing purchasing managers’ index (PMI) level in April (62.9) was an all-time high, while the services PMI (50.3) finally returned to expansionary territory for the first time since August 2020 (readings above 50 indicate expansion). The European Central Bank’s (ECB’s) Governing Council kept key interest rates unchanged, as widely expected, and there was no change to quantitative easing from March’s decision to up the pace of bond-buying under the Pandemic Emergency Purchase Programme (PEPP). The Governing Council’s press conference focused largely on the programme and provided little indication that the ECB is likely to deviate from ultra-accommodative monetary policy any time soon.
Notwithstanding an impressive rollout of vaccinations in recent months, data releases in May are expected to show the UK economy weakened over Q1, with the February expansion not enough to offset the lockdown-induced weakness seen in January. That said, the data continues to point towards moderation of the impact of COVID, which has allowed for further easing of restrictions and should see the UK economy grind higher in Q2. The flash composite PMI reading for April climbed to 60.0, the highest since November 2013, while the manufacturing PMI also touched all-time highs. In labour markets, hiring has returned to pre-pandemic levels, growing at the fastest rate since 2017. The Bank of England is scheduled to meet on 6 May, with the minutes from the meeting and the bank’s Monetary Policy Report (MPR) publication likely to show upward revisions to the bank’s growth forecasts (against the backdrop of rapid vaccinations, easing of restrictions and positive data surprises). It is widely expected the Monetary Policy committee (MPC) will keep the Bank rate steady at 0.10%, and this may well be the last meeting where quantitative easing targets are left unchanged on account of the improved economic outlook.
China played its part driving the global recovery, with the country’s economy advancing 18.3% year on year in Q1 2021. This was a sharp acceleration from the 6.5% reading in 4Q 2020, boosted by strong domestic and external demand, alongside continued monetary and fiscal support. The country was the first major economy to get the coronavirus under control. The latest figures showed a rebound in consumer spending, which had lagged the recovery. Official indicators did, however, reveal China’s economy expanding at a slower clip in April. The official manufacturing PMI remained above the expansionary 50 mark, but retreated in April to 51.1 from 51.9 the previous month, with many firms citing shortages of semi-conductors and shipping containers, as well as rising shipping costs, as headwinds. The non-manufacturing gauge fell to 54.9, below economist expectations of 56.1, but ahead of manufacturing activity – reinforcing the narrative of services closing the gap on manufacturing. In monetary policy, the People’s Bank of China asked banks to rein in loan advances in the coming months as it continues its campaign to tighten credit and prevent asset bubbles. At the time of writing, it remains highly unlikely that Beijing will make any sharp turns in its monetary or fiscal policy, which could risk derailing the recovery.
The latest trade data in South Africa surprised to the upside. The trade surplus rose in February as exports accelerated 16.5% month on month (m/m), ahead of the modest 1.5% increase in imports over the same period – supporting the view that global activity at ports has remained relatively robust in the year to date. Retail sales data also surprised to the upside, rising 6.9% m/m in February following 10 straight months of declines. The manufacturing PMI slid to 56.2 in April, from 57.4 the previous month. Headline inflation quickened in March (3.2% year on year, from 2.9% in February), in line with consensus expectations, thus moving back within the South African Reserve Bank’s (SARB) 3–6% target range, and signalling that price pressures began to intensify in March. Core prices, however, remained muted, slowing to 2.5% from 2.6% the previous month, reflecting subdued underlying pressure, which could potentially see the SARB’s hiking cycle pushed even further back. At the time of writing, money markets are pricing in a less-than 25 basis-point hike in the Bank rate by the end of this year. On the fiscal front, the South African Revenue Service reported an additional R138 billion in tax collections ahead of its initial 2021 tax-year target, owing to an improved economy and better-than-expected performance from firms in the mining and financial services sectors. That said, the current stand-off in wage negotiations between the government and trade unions casts a shadow over the fiscus.
Commodities led market performance in April, with the Bloomberg Commodities Index closing the month 8.3% higher (the strongest monthly return in almost a year). The Bloomberg Commodities Agriculture Index was a notable outperformer, up 13.4% in April as developed nations return to normalcy. Copper rallied to US$10,000 in April, with the industrial metal continuing to find favour amid the global economic recovery and growing momentum in green transitions. Oil prices posted another strong month of gains on positive economic data and a brighter outlook for fuel demand in key markets (US, China, UK) and industries (air travel) in the coming months.
Figure 1: April 2021 % change (US$)
Source: Bloomberg as at 30.04.21.
The South African stock market started off on the front foot but gave up some of that momentum in the second half of April. In the end, the benchmark FTSE/JSE All Share Index stretched its winning streak to six months as it saw out April with a soft 1% gain, with the Capped SWIX not far behind at +0.8%. At a super-sector level, financials (+3.4%) returned to positive territory, resources were up 2.9%, but industrials finished 1.2% lower. In yield-oriented assets, local bonds (JSE All Bond Index) outperformed equities over the month, with yields drifting lower on the back of supportive external and domestic dynamics. Listed property was the best-performing asset class over the month, with the JSE All Property Index rallying 11.5% in April, bringing its year-to-date return to +24.2% as the absence of lockdown restrictions this year continues to propel the sector forward. Cash, as measured by the STeFI Composite Index, remained broadly stable at 0.3% for the month. In currencies, the rand firmed against the US dollar and pound sterling, but traded weaker against the euro.
At the sector level, April was a positive read across most of the bourse, notwithstanding some pockets of weakness in some consumer sectors. Key sector leaders over the month were in healthcare (Aspen Pharmacare) and basic materials; chemicals delivered a solid performance as Sasol continued to benefit from the surge in international oil prices, while Aspen’s share price made a leap following SA’s resumption of the Johnson & Johnson vaccine and positive analyst upgrades. Consumer services continued to deliver a positive performance on the back of the travel and leisure sub-sector (City Lodge Hotels), which is benefitting from the absence of lockdown restrictions. Bucking the trend was consumer goods, which ended in the red, dragged lower by index heavyweight British American Tobacco after the US Food and Drug Administration said it will propose a ban on menthol-flavoured cigarettes. Technology also ended the month in the red.
Selection of FTSE/JSE All Share Index stock performance
|Name||Index weight||Apr 2021 % return (ZAR)|
|British American Tobacco||1.7||-4.4|
|Mr Price Group||0.6||-6.1|
Source: Bloomberg as at 30.04.21.