Market Overview
Global markets maintained positive momentum during March (MSCI World Index: +3.4%, MSCI Emerging markets Index: +1.2%) with developed markets continuing to outperform emerging market peers. Gains were once again supercharged by a handful of technology behemoths, namely the "Magnificent Seven" (i.e., Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) as the artificial intelligence (AI) theme continued to drive expectations for hypergrowth within the sector. Investors also continued to monitor monetary policy activity across the globe, with recent updates to market forecasts (pertaining to interest rate cuts) now resulting in a more aligned view between investors and key central bank officials. Despite the generally positive mood across equity markets, geopolitical tensions in major regions continued to create some hesitation.
The US market continued to dominate global equities with the S&P 500 adding 3.5% at the time of writing. While we did see an improvement in the broader market with the Russel 2000 Index up 3%, the stellar performance was once again driven by technology mega caps amid a standout performance from Nvidia (+14.7%) and Alphabet (+8.6%). In terms of central bank activity, the Federal Reserve held steady on interest rates at the conclusion of its March meeting and stuck with its forecast for three interest rate cuts this year (officials believe the federal funds rate would end 2024 at 4.5% to 4.75%, equivalent to three quarter-point cuts) despite sticky inflation readings. Fed Chair, Jerome Powell, also noted that continued strength in the labour market wouldn't be a reason to hold off on lowering interest rates. However, an unexpected weakening in the labour market may warrant additional policy intervention. Officials also upwardly revised their economic growth forecast for 2024 to 2.1%, well above the prior estimate of 1.4%, with growth in 2025 expected to come in at 2% (prior: 1.8%). Despite firmer economic forecasts and expectations for slightly higher inflation, the Fed's existing view over rate cuts in 2024 remains intact - however, the dot plot has been adjusted to reflect fewer rate cut expectations in 2025.
Moving over to the Eurozone (Euro Stoxx 600 Index: +3.6%), the European Central Bank (ECB) maintained its interest rates at historically high levels during its March meeting - the main refinancing operations rate remained at a 22-year high of 4.5%, with the deposit facility rate unchanged at 4%. ECB President, Christine Lagarde, indicated that officials may begin to loosen policy in June but are unable to commit to a particular path of interest rate cuts, despite signs that wage growth has peaked in the Eurozone. Future decisions will remain data dependent and meeting-by-meeting as officials assess the latest economic readings. The ECB also lowered its inflation forecast for the next few years, and downwardly revised growth expectations for 2024 on the back of expectations for continued economic pressure during the rest of the year.
China's authorities have set their annual growth target at 5%, acknowledging the current challenges being faced in the region and citing that policy support and effort will be required “from all fronts” to boost its flagging economy. This target matches that of 2023 and was expected by the market, but still presents a challenge as consensus for actual economic growth this year is still stuck at the 4.6% mark. This would require major additional intervention as the country continues to battle a pronounced slump in the property market, geopolitical instability, and deflationary pressures. The equity market continues to digest these proposals with a level of scepticism, reflected in the MSCI China Index (-1.6%) returning a relatively soft performance for the month of March.
Looking at the local market, the All Share Index was able to gain some momentum (+1.8%, USD: +2.9%), however, sentiment remains fragile due to ongoing concerns about energy insecurity and general infrastructure challenges, with the upcoming general election being flagged as a high-risk event (particularly among offshore investors). Meanwhile, as expected, the South African Reserve Bank (SARB) unanimously decided to keep its key repo rate at 8.25% at its March meeting - marking the fifth consecutive meeting at 2009-highs. The bank highlighted that risks to the inflation outlook were skewed to the upside. Forecasts now indicate that inflation is expected to reach the midpoint of its target range only by the end of 2025, later than previously predicted. The SARB also maintained its growth projections at 1.2% for 2024 but upwardly revised expectations to 1.4% for 2025 (prior: 1.3%).
Economic data overview
Interest rates in the US expected to decrease by the end of 2024
Flash estimates showed that the S&P Global Composite PMI for the US edged down to 52.2 in March, compared with February's eight-month high of 52.5 - this was better than expectations. The latest reading still indicated a solid monthly improvement in business activity. Retail sales increased 1.5% y/y in February (ahead of expectations), following a flat reading in January. The US recorded a $67.4 billion trade gap in January (against expectations of $63.5 billion), the biggest in nine months, compared to an upwardly revised $63.5 billion gap in December. The unemployment rate rose 0.2% to 3.9% in February, touching the highest level since January 2022 and surpassing market expectations of 3.7%. The annual inflation rate unexpectedly edged up to 3.2% in February, compared to 3.1% in January and above forecasts of 3.1%. The Federal Reserve kept the fed funds rate steady, as expected, for a fifth consecutive meeting in March 2024. Policymakers still plan to cut interest rates three times this year, similar to the quarterly forecasts in December. The plot also indicated three cuts in 2025, one fewer than in December, and three more reductions in 2026.
ECB expected to start rate cutting cycle by mid-year, will still maintain its data-dependant approach
On a preliminary basis, HCOB Eurozone Composite PMI rose to 49.9 in March, up from 49.2 in the previous month and slightly surpassing market expectations of 49.7. The latest reading was the highest for nine months and indicated a near-stabilisation of business activity, with service sector output rising for the second consecutive month in March after six months of decline. Retail sales dropped by 1% y/y in January, following a revised 0.5% contraction the month before and compared with market expectations of a 1.3% fall. The region recorded a trade surplus of €11.4 billion in January 2024, compared with a deficit of €32.6 billion in the same period last year. The unemployment rate edged lower to 6.4% in January, the lowest on record, from 6.5% in December, matching market forecasts. The Consumer Price Inflation (CPI) rate in the Euro area was confirmed at 2.6% y/y in February, the lowest rate in three months but still exceeding the ECB's target of 2%. The ECB maintained its interest rates at historically high levels during its March meeting (as expected), as policymakers balanced concerns over a looming recession with persistently elevated underlying inflationary pressures. The ECB has also revised its growth projection for 2024 down to 0.6%, anticipating continued subdued economic activity in the near future. However, they foresee a subsequent uptick in growth, with the economy expected to expand by 1.5% in 2025 and 1.6% in 2026.
Inflation data out of the UK continues to support expectations for contractionary monetary policy
Initial reports showed that the S&P Global UK Composite PMI edged down to 52.9 in March from 53 in February and just below expectations of 53.1. Still, it was the fifth month of expansion in the country's private sector thanks to a solid increase in output. Retail sales volumes in the UK declined by 0.4% y/y in February, following a downwardly revised 0.5% increase in January and compared with market expectations of a 0.7% decline. The UK's trade deficit widened to £3.1 billion in January 2024 (softer than expectations of a deficit of £2.3 billion), up from a three-month low of £2.6 billion recorded in the prior month - this was propelled by a 1.4% surge in imports coupled with a 0.7% rise in exports. The unemployment rate edged up to 3.9% between November 2023 and January 2024, largely unchanged from the previous quarter but slightly above the market consensus of 3.8%. The Bank of England (BoE) maintained the bank rate at 5.25% (as expected) during its March meeting, its highest level since 2008, as policymakers awaited clearer signals indicating that the country's persistent inflationary pressures had subsided. The announcement came a day after data revealed that the country's CPI rate had dropped to 3.4%, its lowest level in almost two-and-a-half years. Governor Bailey expressed optimism about Britain's economic trajectory, suggesting that conditions were favourable for the central bank to begin reducing interest rates, but stressed the necessity for greater certainty regarding the economy's control over price pressures.
Chinese authorities note that policy support and effort will be required from all fronts to boost its economy
The Caixin China General Composite PMI moderated for the second straight month to 52.5 in February 2024 from 52.7 in January. It was the 14th straight month of expansion in services activity but the softest pace since last November amid a subdued increase in overall new work. Retail sales increased by 5.5% y/y in January-February 2024 combined, topping the market consensus of 5.2% and following a 7.4% rise in December. China's trade surplus increased to $125.16 billion in January-February 2024, surpassing market forecasts of $103.7 billion, as exports rose more than imports. The surveyed urban unemployment rate averaged 5.3% in January-February 2024. China's consumer prices rose by 0.7% y/y in February, above market forecasts of 0.3% and a turnaround from the sharpest drop in over 14 years of 0.8% in January. The People's Bank of China (PBoC) kept benchmark lending rates unchanged at the March fixing, as was widely expected. The one-year loan prime rate (LPR), the benchmark for most corporate and household loans, was retained at 3.45%. Meanwhile, the five-year rate, a reference for property mortgages, was maintained at 3.95% following the biggest-ever reduction of 25bps in February. Both rates are at record lows, as the central bank seeks to spur an economic turnaround in the face of headwinds from the property sector and a near-record low in consumer confidence.
The Bank of Japan (BoJ) scrapped the world's last negative interest rate and further unconventional stimulus tools
Early estimates showed that the Jibun Bank Composite PMI increased to 52.3 in March from a final reading of 50.6 in February. It was the highest reading since August 2023, pointing to the third consecutive month of growth in private sector activity, as service providers expanded the most in ten months, while the manufacturing sector contracted at the softest pace in four months. Retail sales rose 2.3% y/y in January, slowing from an upwardly revised 2.4% gain in December and matching the consensus forecast. Japan's trade deficit decreased sharply to ¥379.4 billion in February (compared with market estimates of a gap of ¥810.2 billion) from ¥928.9 billion in the same period last year. The unemployment rate stood at 2.4% in January 2024, unchanged from the previous month which was also the consensus forecast. The annual inflation rate climbed to 2.8% in February 2024 from 2.2% in the prior month, accelerating for the first time in four months and reaching the highest since last November. The BoJ raised its key short-term interest rate to around 0% to 0.1% from -0.1% in March 2024, matching market expectations and halting its eight years of negative interest rates. It is the first interest rate hike since 2007. Furthermore, the BoJ will slowly reduce the pace of corporate bond buying before fully stopping it in about a year. Still, the bank added that in case of a rapid rise in long-term rates, it would make nimble responses, such as increasing the amount of Japanese government bond purchases.
Local interest rates remain on hold for a fifth time in a row
The composite leading business cycle indicator in South Africa went down 0.5% m/m in January 2024, the third consecutive month of decline, although slightly easing from a downwardly revised 0.7% fall in the previous month. In contrast, the SACCI Business Confidence Index rose to a one-year high of 112.3 in January, up from 112.1 in the prior month, underpinned by increased merchandise imports, higher sales of new vehicles, a rise in tourism, and an uptick in retail sales. Retail sales fell by 2.1% in January compared to the same month a year earlier, following an upwardly revised 3.2% increase in the prior month. The decline is mainly attributed to a fall in retail sales for textiles, clothing, footwear, and leather goods (-6.6%), pharmaceuticals (-4.4%), hardware, paint and glass (-4.3%) and food, beverages and tobacco (-1.1%). A trade gap of R9.4 billion was recorded in January, compared to an upwardly revised surplus of R15.6 billion a month before and worse than market forecasts of a R5.2 billion shortfall.
Local mining production dropped by 3.3% from a year ago in January, following a downwardly revised 0.2% increase in the prior month, against market forecasts of a 0.2% rise. It marks the first decline in mining activity and the steepest since July last year after three consecutive months of advances. Manufacturing production rose by 2.6% y/y in January, following an upwardly revised 1.3% increase in the prior month and surpassing market forecasts of a 0.7% growth. In February, composite PMI edged up to a reading of 50.8 (vs a reading of 49.2 a month before), indicating a slight improvement in the country's private sector following a two-month period of negative readings, mainly due to stabilised new business volumes after experiencing significant declines over the past four months. Manufacturing PMI increased to 51.7 in February, from 43.6 in the previous month. The latest reading indicated a renewed expansion in factory activity in February, the strongest since early 2023, following a steep contraction the month before.
CPI rose to 5.6% in February, up from January's 5.3%, slightly above market forecasts of 5.5%, and moving farther from the central bank's preferred 4.5% midpoint of the 3% to 6% target range. Core inflation (which excludes the price of food, non- alcoholic beverages, fuel, and energy) rose to an eight-month high of 5% in February, up from 4.6% in the prior month, and ahead of market expectations of 4.8%. The SARB unanimously decided to leave its key repo rate unchanged for the fifth time in a row at 8.25% on 27 March 2024, as was widely anticipated. This decision keeps borrowing costs at their highest since 2009, amid uncertainty regarding the inflation outlook.
Market Outlook in a nutshell
Local
Global
Revisiting the ESG investment case - is it still worth it?
By Hashmeel Suka
In the last decade or so, environmental, social and governance (ESG) factors have become an important consideration in the investment decision-making process. By extension, it has also become more important for companies to have a focused and clear approach in addressing ESG issues and risks. ESG factors encompass how companies contribute to the conservation of the natural world, what impact is made on people and society, as well as what business standards and practices are used. Essentially, this is driving companies toward enhancing value for all stakeholders involved and not just shareholders alone. It has been reasoned that placing a stronger emphasis on ESG matters may in fact also translate into better returns to shareholders. Some of the arguments to support this view:
It follows that these factors can improve company profitability, valuations and consequently, share price returns.
Mixed fortunes
In the South African context, the past ten years shows that the investment performance of companies with a stronger focus on ESG factors has been mixed. The JSE All Share index underperformed its comparative ESG benchmark between 2015 and mid- 2021, but then outperformed this benchmark thereafter.
A recent academic study showed no real benefits (i.e., alpha) when it came to ESG investing locally. Heerabhai (2022) examined the effect of ESG ratings on the financial performance of firms in South Africa, using both regression and portfolio analysis. The study took a sample of 88 firms listed on the JSE for which ESG ratings (per Bloomberg methodology) were available consistently, corresponding to a six-year time period between 2013 and 2019. Firms were then ranked according to their ESG scores and placed into distinctive portfolios (e.g., those with high ESG-ratings and low ESG-ratings) which were tested against an equally weighted benchmark of the same universe of stocks. The study ultimately showed that over the time period, investments with a particular focus on ESG led to no significant financial advantage at a portfolio level.
From an international point-of-view, we also see quite contrasting results. The S&P500 and the Nifty 50 have consistently outperformed the MSCI ESG benchmark over the period, while other indices (or markets) have underperformed the benchmark, with the Hang Seng and ASX showing notable weakness.
Possible explanations for mixed outcomes
1. There is a myriad of providers of ESG scores, with methodological divergence and potential flaws in the way ESG scores are calculated.
2. Proponents of the efficient market hypothesis argue that a valid explanation for the varying results is that information about ESG factors are already reflected in share prices and hence investors should not be compensated (or accordingly disadvantaged) for overweighting or underweighting any ESG factors.
3. Interest and support in ESG investing has faded. From 2015 there was significant growth in ESG investing. According to a study done by the Global Sustainable Investment Alliance (GSIA), assets under management (AUM) within the ESG market amounted to ~$22.8 trillion in 2016, grew to ~$30.7 trillion in 2018 and eventually reached a peak of ~$35.3 trillion in 2020. In the 2022 review of the study, it showed that the global market for sustainable assets had shrunk to ~$30.3 trillion in that year. This contraction in ESG flows has been markedly evident in the US, where several asset managers noted a sharp decline in ESG-related AUM. Some of the reasons for this was purported to be general market weakness (amid a tough economic environment) as well as a decline in confidence about the benefits, and some concerns about the risks, of ESG investing.
4. Investor attention being diverted elsewhere - following years of "easy" market conditions, it has become more difficult to navigate global risk in markets. Between Covid-19, high inflation, rising interest rates, several major wars, the AI boom and political distractions, investors may have lost focus on company specific ESG issues.
Is there still an argument to be made for sticking with ESG?
The above reasons are all legitimate concerns when deciding on whether it is still worthwhile to invest in ESG funds or assets. But, aside from the efficient market hypothesis argument (which would suggest investors just buy a market fund anyway) most of the current concerns around the ESG space can be addressed.
Scoring methodology is becoming more advanced and will be pushed to convergence over time. ESG investing is a relatively new phenomenon, and it can take the market a long time to find consensus on how to approach a concept that is as vast and complicated as ESG. Our suggestion would be to take a more nuanced approach to ESG investing for the time being - perhaps by focusing on specific sectors like new energy and clean water or identifying companies that truly strive to become sustainable and are future-focused.
In terms of investor interest, it may be a cyclical phenomenon where macroeconomic conditions and widespread uncertainty from a geopolitical and political perspective will keep investors at bay until the situation stabilises or improves. Taking a longer-term view, we will happily still back companies and sectors that demonstrate broader stakeholder considerations and good governance as opposed to those operating extractive and damaging business models or who show little regard to corporate best practice. While returns may not be linear, these companies will likely have more longevity, lower volatility, and carry lower financial and operational risk over time.
Finally, investors can use ESG strategies to attain greater non-financial utility (like happiness and comfort) as opposed to traditional ones. Being invested in companies and sectors that are building to "make the world a better place" may align better to your personal values and could support at the very least "a feeling" of taking less risk.
Disclaimer: All figures have been obtained from Bloomberg based on each company's latest financial results. Companies disclose degrees of geographic exposure in varying granularity, which may cause discrepancies, and figures obtained may be impacted by currency volatility and may not be representative of future exposures.
For more information regarding your investment, please contact your Portfolio Manager directly.
Regards
FNB
