Q1 MARKET COMMENTARY

Overview

• Major central banks kept their key interest rates unchanged.
• An AI-fuelled market rally helped lift Wall Street to record highs this quarter. Bonds delivered a negative return as yields crept slightly higher.
• Locally, the SARB also left interest rates unchanged. Interest rate cuts are likely to only materialise towards the end of 2024.

Global markets

At the start of the year, many investors were optimistic about the market, coming off big gains in 2023, led by large cap technology shares. However, few predicted just how powerful the rally would be. After an up-and-down start to the year on the back of the market pricing in aggressive rate cuts in the world’s largest economy, global equity markets continued their strong performance with many ending the quarter at all-time highs.

• Q1 returns ($)
• MSCI AC World: 8.2%
• S&P 500:10.6%
• NASDAQ: 9.3%

The consensus view is that interest rates have peaked in major developed countries, with central banks indicating they would likely only start trimming interest rates during the second half of this year. Disappointing inflation data affirms the case for the central banks to hold off on cutting their short-term interest rate targets, but did not rule out trimming rates later in the year.

The MSCI AC World Index gained 8.2% in Q1 and 23% over the past 12 months, while the S&P 500 finished the quarter up 10.6%. The market rally has broadened over the past few months, moving from the story of a few tech stocks – the ‘magnificent seven’ – to other sectors sensitive to economic shifts, such as materials and industrials.

Across the globe, the Nikkei 225 Index gained another 21% – a new record high – overtaking levels reached in 1989. This performance was driven mainly by gains in technology shares. The government’s push to improve corporate governance also boosted dividends and share buybacks. Warren Buffett’s endorsement, through his big investment in Japanese trading companies, gave sentiment another push.

In China, the CSI 300 Index gained 3% in Q1, after Chinese policymakers stepped up their efforts to support the economy and sliding markets. Foreign investors, however, remain wary of a government that has clamped down on private enterprise. The MSCI China TR Index lost 18% in US dollar terms over the past 12-months.

Global bonds dropped this year as central banks pushed back on early rate cuts. The 10-year US Treasury yield finished the quarter at 4.19% after starting the year at 3.86%, with the Bloomberg Global Aggregate TR Index down 2% in the year to date.

South Africa

Growth for 2023 was only 0.6%, compared to 1.9% in 2022. Looking ahead, the IMF downgraded its economic growth forecasts for SA, warning that logistical challenges are constraining activity. The economy is likely to grow a meager 1% this year, although the Reserve Bank is forecasting a slightly higher rate of 1.2%. However, this is also well short of the growth rate required to overcome the country’s stagflation challenges of low growth, high inflation, and high unemployment.

The Monetary Policy Committee (MPC) kept interest rates on hold at 8.25% for the fifth time in a row, signalling a delayed start to an anticipated cutting cycle, with inflation risks still skewed to the upside. Inflation tilted further upwards to 5.6% in February, from 5.3% in January.

• Q1 returns (ZAR)
• All Share Index: -2.3%
• All Property Index: 3.5%
• All Bond Index: -1.8%
• Money Market: 2%

During the first quarter of the year, the rand depreciated 2% against the US dollar, mainly due to dollar strength, with interest rates due to stay higher-for-longer. The JSE All Share Index lost 2.3% in Q1, and numerous events resulted in the overall market underperforming – from a raft of disappointing earnings announcements and trading updates, to the decision by the SARB to keep interest rates higher-for-longer.

Financials were the main drag, losing 6%. Notwithstanding an uptick in Platinum Group Metals’ (PMG) prices in March, the underlying performance in the mining sector remains weak. Resources shares were down almost 2% in Q1. Industrials managed to grind-out a small positive return, gaining almost 1%. This was led by British American Tobacco (BAT) gaining almost 7% following the decision to commence with a $2 billion buy-back program after selling part of its stake in India’s ITC.

Unfortunately, retail stocks plummeted on the back of the depressed local consumer environment, with retail sales volumes contracting by 2.2% year-on-year in January. This, together with paper and packaging company Mondi Plc losing 16% after agreeing to buy DS Smith Plc for £5.1 billion (R119 billion) in a deal that would create one of the world’s largest manufacturers of packaging.

The JSE All Property Index gained 3.5% YTD. Valuations in the market appear attractive and positive rental reversions and better-than-expected earnings could see a re-rating in the sector. The JSE All Bond Index lost 1.8%, as yields crept slightly higher during Q1. Money market assets, as measured by the STeFI Composite Index, delivered 2%.

Annualised returns – period ended 31 March 2024