By Trevor Garvin, Head of Multi-Management at Nedgroup Investments
The past few weeks have been eventful for both global and local markets, with geopolitical developments, monetary policy decisions, and economic data releases shaping investor sentiment.
Locally, political uncertainty remains a key focus as President Cyril Ramaphosa continues to face scrutiny surrounding the Phala Phala matter. Parliament’s impeachment committee, comprising 31 MP’s chosen across 16 political parties, has been established. Makashule Gana, from the Rise Mzansi party was elected as chairperson of the committee in the past few days. Markets will be watching closely to ensure that the process is conducted transparently and fairly.
From an economic perspective, the South African Reserve Bank (SARB) increased interest rates last week by 25 basis points, taking the repo rate to 7.00% and prime rate to 10.5%. This move was largely anticipated by financial markets and had been priced in. Rising oil and energy prices have contributed to inflationary pressures, prompting the central bank to adopt a more cautious stance. While necessary to contain inflation, higher borrowing costs are likely to reduce some of the momentum behind South Africa’s economic recovery and growth outlook over the coming year.
Global developments support market sentiment
Internationally, developments in the Middle East provided some relief to investors. Reports that negotiations between the United States and Iran are progressing towards an agreement to reopen key shipping routes through the Strait of Hormuz helped ease concerns over global energy supply disruptions.
As a result, Brent crude oil prices fell sharply, declining to approximately $93 per barrel. This represents a fall of over 10% in the past week from the previous price of $104 per barrel. Should oil prices remain at these lower levels, inflationary pressures globally may begin to moderate, potentially creating a more favourable environment for both consumers and central banks.
Improved geopolitical sentiment supported risk assets across global markets. Major US equity indices delivered solid gains during the week, with the S&P 500 rising 1.2%, the Dow Jones Industrial Average advancing 1.3%, and the Nasdaq gaining 1.5%. Strong corporate earnings, particularly from technology, healthcare and consumer discretionary companies, helped drive markets higher.
European markets also recorded positive performances, while Japan’s Nikkei index outperformed many of its developed market peers, supported by easing energy costs and encouraging domestic economic data. The Nikkei is up over 15% in the past month.
South African markets remain resilient
Despite concerns around higher interest rates, South African financial markets demonstrated resilience. The local equity market gained 1.6% over the week, supported primarily by strong performances from the basic materials sector.
The rand strengthened further, trading around R16.22 against the US dollar, aided by improved global risk sentiment and the SARB’s decision to raise interest rates.
Financial shares experienced some late-week weakness following the Reserve Bank’s hawkish messaging but still managed to close the week in positive territory.
Commodities and bonds reflect changing inflation expectations
Commodity markets experienced significant movement, with oil prices being the standout performer on the downside. Brent crude declined by more than 10% during the week, marking its lowest level since April.
Precious metals were relatively subdued, with gold and platinum prices easing slightly.
Bond markets responded positively to the lower oil price environment. South Africa’s benchmark 10-year government bond yield declined from 8.68% to 8.40%, while the US 10-year Treasury yield fell from 4.66% to 4.45%. These moves reflect easing inflation concerns and growing expectations that central banks may not need to tighten policy as aggressively in the future.
Growth outlook remains challenging
South Africa’s first-quarter GDP growth came in at just 0.2%, down from 0.4% in the previous quarter. While the economy remains on a modest growth path, the pace of expansion continues to disappoint.
Our expectation remains for economic growth to improve slightly from approximately 1.1% to around 1.2% over the coming year, supported primarily by consumer spending and the benefits of earlier interest rate reductions.
However, risks remain firmly tilted to the downside. Ongoing tensions in the Middle East could lead to renewed increases in fuel prices, placing further pressure on inflation and potentially requiring additional monetary tightening. Higher interest rates would likely dampen household spending and business investment, creating further headwinds for economic growth.
Looking further ahead, we forecast average annual growth of approximately 1.7% over the next three years. While this represents gradual improvement, meaningful structural reforms will be required to unlock stronger and more sustainable economic expansion.
Conclusion
Investors continue to navigate a complex environment characterised by geopolitical uncertainty, evolving inflation trends and shifting central bank policy. While recent declines in oil prices and easing global tensions have provided welcome support to markets, South Africa’s economic recovery remains fragile.
Maintaining a diversified investment strategy and focusing on long-term objectives remains critical as markets continue to balance opportunities against an increasingly uncertain global backdrop.
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