May was another good month for SA investors as bonds and equities delivered positive returns despite a slew of hair-raising global inflation numbers. Bonds had a star performance with the FTSE/
JSE All Bond Index and the Composite Inflation-Linked Index gaining 3.7% and 3.4% respectively.
Interest bearing assets benefited from abating inflationary fears as investors settled for a more sober view that April and May inflation spikes were not durable. The search for yield was rejuvenated leading to an increase in inflow into SA bonds. Yields on long-dated SA bond compressed, with the 10-year yield moving closer to 9%.
The moderation in developed market bond yields amidst a weakening dollar made the relative carry in emerging market bonds appealing.
Equities were not too far behind as they gained 1.6% underpinned by strong performances from financials and industrials which covered for the slack in resources which fell 1.4%. The underperformance from resources seems to have been driven in large part by the rand because most commodity prices were generally firm. Investors must also be positioning themselves for an imminent weakness in commodity prices following a oncein-100 years rally over the past few months. The yellow metal staged an impressive comeback gaining 7.8% for the month on the back of increasing inflationary concerns globally.
Inflation was perhaps the dominant sentiment driver in May. In SA annual headline inflation jumped 4.4% in April compared to the 3.2% reading recorded in March. The main upward drivers were transportation costs caused by higher petrol prices. Unlike developments elsewhere, food inflation has been moderate in SA compared to global peers due to a stronger rand and expectation of a bumper harvest in 2021. That said inflation risks could arise from increased wage demands and higher domestic import tariffs. We are also concerned about risks from electricity and other administered prices.
The economy continued to recover, which further firmed the migration of capital into our shores. The current account surplus increased by R267bn in the first quarter of 2021 making it the second-largest surplus ever recorded by SA, thanks to mining exports, elevated commodity prices and softer imports.
Positive economic activity numbers also added impetus to the good SA story; the economy grew 4.6% on an annualised basis in the first quarter of 2021. Unsurprisingly the mining sector was the star performer, posting an increase of 18.1% (adding 1.2% points to the annualized growth figure). The mining sector has been the main beneficiary of the global economic restart coupled with several proposed infrastructure plans which have bode well for commodities in general. Further, the propulsion of commodity prices has been on the back of demand and supply imbalances. The other sectors that performed well were finance and trade both increasing 7.4% (adding 1.5% points) and 6.2% (contributing 0.8% points), respectively.
The question we are trying to figure out is whether these numbers can be sustained. The finance and trade sector seem to have some runway as they are correlated to general levels of economic activity. As the economy continues to open, capacity in these sectors will also improve allowing them to contribute more to GDP.
The recent tightening of restrictions by president Ramaphosa may get in the way of that but we think the measures will be temporary. We are concerned about the mining sector, which is cyclical and less durable.
With prices of several commodities at historical highs, it is very difficult to see the mining sector replicating its recent GDP performance.