Counting the cost
South Africa’s neutral stance on the Russia–Ukraine conflict was called into question by claims from US ambassador Reuben Brigety that arms were sold to Russia earlier this year. Concerns that this would further weaken the country’s chances of retaining preferential trade access to the US via trade agreement arising from the African Growth and Opportunity Act (AGOA) and the possibility of explicit or implicit sanctions to follow sent the currency in a downward spiral. This further increased the stakes for investors already contending with the ongoing energy crisis. A panel has been appointed to investigate the matter with a proposed timeline of six weeks.

Headline inflation for the year to April 2023 declined to an 11-month low of 6,8% from 7,1% in the previous month, with core inflation increasing to 5,3%. Headline inflation printed lower than market expectations, reflecting moderation in the impact from energy prices offset by continued upward pressure in food prices. Producer inflation continued to trend lower, surprising to the downside relative to expectations. Currency weakness and volatility increased the market’s assessment of the probability of further interest rate hikes. The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) lifted the bank’s key lending rate by 50 basis points (0,50%) to 8,25% with a unanimous vote. Forecasts for headline inflation were adjusted higher for 2023 and 2024, with expectations for a moderation in headline inflation sustainably back to the 4,5% midpoint by the end of 2025. Core inflation forecasts were also adjusted higher. 
 

Risks to the inflation outlook are still assessed to be to the upside and will continue to be a key driver for the progression of the interest rate hiking cycle, leaving the door open for further tightening.

Local politics, the energy crisis and a stronger US dollar weighed on the currency in a meaningful way. Actions from SARB provided little relief. The rand depreciated by approximately 7,9% against the US dollar in May, bringing the ytd decline to a painful 16,0%. Pricing of local bonds reflected a myriad of investor concerns, many of which contribute to the risk of deteriorating fiscal dynamics. The FTSE/JSE All-bond Index declined by 4,7% in May, bringing ytd returns to -2,6%.

Domestic equity markets gave way to the wall of worry plaguing the fortunes of the country but also extending to China, where economic data has disappointed those expecting a more robust economic recovery. The FTSE/JSE All Share lost 3,9%, with financials (-7,9%) and even industrials (-3,1%) under pressure. Mid-cap counters underperformed their large- and small-cap counterparts. In particular, mid-cap counter Transaction Capital lost a hefty 43,3% over the month, bringing its decline to 82,5% over the past 12 months.