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Monthly Market Wrap - May 2009
Added on 31 May 2009 @ 12:00 AM
Market highlights
Bear market rally or sustainable recovery? That seems to have been the main deliberation on most investor's mind during the month. On the one hand, global equity markets continued their April performance with reassuring returns in May. US markets once again led the way, with the S&P 500 and Nasdaq Composite indices gaining 5.07% and 3.34% respectively. Further abroad, the FTSE 100 edged 4.12% higher, whilst Nikkei 225 ended 7.8% higher. The increase in global risk appetite reflected a sense that the worst was behind us, and several data releases bore this out. US consumer confidence improved to the highest level since September. Investor confidence was also boosted by US Home sales stabilising, construction spending edging higher, improved durable goods orders and the rate of decline in US jobless claims slowing. US government stress tests of the 19 biggest banks revealed no unpleasant surprises and the threat of a swine flu epidemic faded quickly. In Japan, factory output data showed the fastest monthly increase in percentage terms in April in 50 years. India's better-than-expected 5.5% quarter-on-quarter gross domestic product (GDP) growth number also added to emerging market confidence.
On the other hand though, there is also an abundance of data that paint a grim picture of the global economy and suggest that recovery is still a way off, and will be slow. US GDP contracted for the third consecutive quarter by 6.1% following the 6.3% contraction in the fourth quarter of 2008 (although this revised figure was an improvement on earlier reports). The story was similar for other major economies, with the Euro-zone's GDP shrinking a worse-than-expected 2.5% for the first quarter and its biggest economy - Germany - contracting by 3.8%. Japan also revealed a GDP decline of 4% quarter-on-quarter.
Even though South Africa too entered a technical recession with a second consecutive quarter of negative GDP growth, the local equity market shrugged off this news. The JSE faired exceptionally well in May with the All Share index gaining 10.29%, buoyed by Resources, which put on 16.37%. Gold and platinum shares did particularly well during the month. Financials edged up 3%. Improved global risk appetite supported riskier currencies, and the rand also continued its strong performance with year-to-date appreciations of 16.6% to the US dollar (breaking through R8/$), 4.6% to the Pound and 15.1% against the Euro.
Looking closer at the GDP numbers, the -6.4% for the first quarter (following -1.8% in the 2008 fourth quarter) was the worst quarterly performance since 1984. The biggest contributors to the decline in GDP were the mining and manufacturing sectors, which contracted 32% and 22% respectively. The decline was not just limited to the export-orientated sectors, though. Local demand was also very weak during the quarter. Retail and wholesale trade declined by 2.5%, while finance, business services and real estate, the country's biggest sector shrank 2.3%. Consumers are clearly still feeling the pressure of the lagged effect of high interest rates, high levels of household indebtedness and rising unemployment. Inflation also remains high, eating away at real disposable income.
April CPI rose 8.4% year-on-year, down from March's 8.5%, but higher than the expected 8.3%. Once again, rising food prices have been largely to blame. April's PPI numbers were far better, rising by only 2.9% year-on-year down from March's 5.3% and well below the expected 3.4%. PPI food numbers also suggest that consumer food prices could stabilise down the line.
Faced with these poor economic figures, the Reserve Bank's Monetary Policy Committee had little choice but cut interest rates by another 100bps, which amounts to a cumulative reduction of 450bps since December 2008 . Governor Mboweni indicated that further substantial rate cuts were not to be expected. Markets expect another cut of 50bps, though, if the economic data remains weak or if there is good news on the inflation front. The Governor identified potentially huge electricity tariff increases as the main risk to inflation, but with the Brent crude price shooting up to $67 at month-end, he will be keeping a close eye on the oil market too. Fortunately the rand's strength will absorb some of the cost of higher oil prices. But a stronger rand also has costs of its own, as it makes the struggling mining and manufacturing sectors less competitive internationally.
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