Monthly Market Commentary – May 2024

Inflation in the US continues on its downward trend, just at a slower pace than originally anticipated by the markets. This has led the US Fed to maintain rates at a higher level. Other central bankers however face slightly different challenges and as such have begun cutting rates in their economies. Despite the higher US rates and increased geopolitical risks markets continue to reward the A.I.-themed rally benefitting the mega-cap US tech stocks such as NVIDIA and Microsoft. Global equities led returns in this environment.

Elsewhere, Chinese optimism has lifted ever so slightly in the midst of a confidence crisis and the UK heats up as they enter the runup to their elections in July. The Labour party lead the Conservative party in the polls.

South African (SA) asset classes had a very muted response during May, choosing a holding pattern after a very strong leadup into the election month. Uncertainty prevailed as the ANC has evidently lost its 30-year majority rule. What is important to recognize is that the elections appear to have been free and fair, and whilst turnout of all eligible voters has been quite low we have observed a peaceful democratic process. All eyes now turn to the coalition phase of our democracy, a very important tone will be set by which parties form coalitions at both national and provincial levels. Given the cheaper valuations of South African asset classes we remain optimistic of good forward returns should some uncertainty settle.

LOCAL DRIVERS
SA Election Results

South Africa peacefully exercised their democratic right to vote at the end of May, initial results indicate a weak performance from the historically dominant ANC. The ANC will likely need to form coalitions in order to form a bloc of more than 50% in the national legislature, concerns around the shape and form of this coalition have resulted in increased market volatility. Parliament will sit and elect a new president in the middle of June, likely confirming any coalitions just prior to that.

NHI Bill

In what seemed to be a last ditch electioneering ploy from the ANC, Cyril Ramaphosa signed the NHI Bill into law two weeks before elections. This has started a long term battle between government, medical aid schemes, civil society and various other bodies. It seems the form and manner in which NHI may eventually come to being will likely be very different to what is currently proposed. Funding for one has not been considered by Treasury at all and the practicalities of this remains a mystery to most.

SA Inflation and Repo Rates

Inflation in South Africa cooled to 5.2% y.o.y. in April from 5.3% the month before. Although slowing down, it remains above the mid-point of the SARB’s inflation target. Given this, the reserve bank kept interest rates on hold at 8.25%.

ASSET CLASS TOTAL RETURNS – ZAR
GLOBAL DRIVERS
US Interest Rates

The Fed has kept the Federal Funds Target Interest Rate unchanged at 5.25%-5.50%. The “higher for longer” mantra remains in the US, and
markets now price in less than 100% probablity of even a single rate cut in the remainder of 2024. US Interest rates, however, remain
important as the global risk-free rate despite other central bankers cutting rates in their own economies. This possibly provides further
impetus for a strong US Dollar as US rates remain attractive relative to the rest of the world.

US Inflation

Data showed that inflation remained even more sticky in the US. Headline inflation rose to 3.4% in April, marginally down from 3.5% the prior
month. Core inflation eased to 3.6% in April, in-line with expectations. Most disappointingly, the Federal Reserve’s preferred inflation
measure (Core PCE – which has a lower weight to housing costs) has printed at 2.8% for the past three months, higher than the expected
2.6% and above the 2% US Fed target.

China Sentiment

Emerging markets, broadly speaking, have benefitted from an increase in global risk sentiment, however, a broader improvement in Chinese
confidence could be a big tailwind for EM should it reverse. Whilst difficult to immediately see where this rise in confidence will come from in a year of US elections it is worth taking note of policy steps taken by the Chinese Government to address the real estate and economic challenges in that economy.

ASSET CLASS TOTAL RETURNS – USD

All information provided courtesy of Portfolio Metrix – adapted and published with permission. No copyright infringement intended.

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