March was rocky with a poor resolution of Cyprus’s debt problems, an inconclusive parliamentary election in Italy, and poor economic data from China, which all weighed on markets. April saw world equity indices continue their rally, which originated from the latter half of last year.  The MSCI World index was up 2.9% for the month after being up 2.1% in March, flat for February, and up 5% in January.  Similar to what occurred previously, developed markets again led the rally, with particularly strong gains in Japan, the US, the Eurozone, and Australia.  This has been largely due to continued quantitative easing in the Eurozone and Japan providing further liquidity to financial markets, as well as falls in commodity prices – for example Brent oil was down 7.0% in April alone.

Of immediate consequence to South Africa is the dramatic slide in the price of metal commodities, highlighted by the substantial fall in gold from a peak of $1,800 last September (and $1,900 in 2011) to $1,322 an ounce in April, although prices recovered in the latter half of the month.  As a result, the JSE All-Share index was down 2.5% for the month and is roughly flat year-to-date.  A weak global economy has reduced demand growth, but the main culprit has been the introduction of new supply after years of expanded capital investment in the mining sector.  This may signal a peak for some commodities (e.g. iron) but perhaps not for others.  Gold, on the other hand, has its own unique set of drivers.

The newly elected president of Kenya, Uhuru Kenyatta, has formed a surprisingly refreshing government, reducing the number of ministers from 44 to 18 (read fewer posts handed out as political favours) and introducing many from the business world into government.  These include six women, with one for defence minister and another who is a potential candidate to head the World Trade Organisation.

Further west, Boko Haram, an extremist Islamic group in Nigeria, was involved in heavy fighting with the country’s security forces, resulting in at least 188 deaths and over 2,000 destroyed houses.  The government has been fighting internal conflicts with Islamic insurgents in the north and tribal elements in the south who are demanding greater autonomy and share of oil revenues.  The country is still expected to grow by 7% this year compared to South Africa’s 3%, and despite Nigeria’s equity market being down 0.3% for the month, it is up 19.1% year-to-date.

Japan’s central bank created the most excitement in world markets, introducing an expansion of its bond-buying programme to include longer-term debt.  This is a continuation of Prime Minister Shinzo Abe’s “three arrow” strategy to end 15 years of economic malaise. This strategy aims to target 2% inflation, provide clearer messaging on monetary and economic policy, and enact structural reforms.  The first two legs of the strategy have produced dramatic results since Abe’s landslide victory last year; the Nikkei is the best performing major market by a country mile, up 12.4% in April alone and up 33.3% year-to-date (it is at its highest level since mid-2008).

Japan’s central bank’s aggressive quantitative easing (it is planning to more than double the country’s money supply) has flooded world markets with liquidity (the yen has also slid to its lowest level against the US dollar in four years), contributing substantially to gains in equity markets and yield compression in debt markets.  The third “arrow” of Japan’s strategy, structural reforms, is usually the most difficult to implement.  However, Abe’s approval ratings are at sky-high levels, and the earnings of Japanese companies and banks are already benefiting from the easier credit and depreciated yen provided by quantitative easing.  The government, having been proven successful so far, will be given a wide leeway to continue its programmes, so it is likely that the Japanese market will continue its resurgence.

In China, an outbreak of the H7N9 strain of bird flu has resulted in a number of deaths.  China suffered major market disruptions during previous outbreaks of SARS and avian flu, and it remains to be seen whether the outbreak turns into a pandemic.  The country’s economy grew at a rate of 7.7% in the first quarter of 2013, a reflection of the government’s effort to target 7.5% growth and rebalance to a consumer-driven economy in the medium-term.  China received the first downgrade of its sovereign debt since 1999 as credit ratings agency Fitch cited unsustainable levels of debt at the local government level, highlighting the need for the rebalancing away from an investment-driven economy.  Its equity market has struggled to come to terms with this economic shift; the Shanghai Composite was down 2.6% for the month and 4.0% year-to-date.

India continued its internal struggle between trying to make itself attractive to investors and catering to populism; the country’s Supreme Court upheld a decision that Novartis, a Swiss pharmaceutical company, was not entitled to a patent for its cancer drug Glivec.  The failure to uphold internationally accepted patents, despite India having agreed to adopt tighter patent laws after joining the WTO, continues a trend of business-unfriendly actions.  The country’s inability to reform itself has meant continued high inflation (10.4% annualised in March) and a significant current account deficit (4.3% of GDP).  It is difficult to imagine the government proceeding with any major reforms until after the next general elections in 2014.  Despite recovering 3.5% in April, the SENSEX is still only up 0.4% year-to-date, lagging developed markets by a significant distance.

In Europe, Enrico Letta, the deputy head of the Democratic Party that won a plurality in the latest parliamentary elections, was chosen to become Italy’s new prime minister.  This comes after Giorgio Napolitano, the retiring president, had to agree to another term after the head of the Democratic Party, Pier Luigi Bersani, was not able to find a successor to Napolitano nor form a government.  The confirmation of a majority government and Letta’s indication of an intention to relax Italy’s austerity programme has given markets a sigh of relief.

Overall, the discourse in the EU has shifted dramatically away from austerity.  Portugal unveiled an ambitious stimulus programme to revive its economy by reducing corporate taxes, creating incentives to attract new companies, reducing red tape that stops investments, and providing cheap financing for smaller firms.  Manuel Barroso, president of the EU, has also stated that the limit of political acceptance for austerity had been reached.  This potential U-turn in policy away from austerity, which frankly never had any hope of succeeding given the Eurozone’s deep recession, has cheered markets, particularly in weaker economies.  The French, Spanish and Italian markets rallied 4.5%, 6.3%, and 9.3%, respectively, in April.

Margaret Thatcher, the Iron Lady who implemented significant supply-side reforms that liberalised the UK economy, died in April.  The country narrowly avoided a triple-dip recession by posting 0.3% growth in the first quarter after contracting by the same amount in the last quarter of 2012.  Fitch downgraded the country from AAA status, and the IMF has now urged the country to ease back on austerity.  Still, the FTSE 100 index was up 0.3% for the month, lower than its Eurozone neighbours, but also up 9.0% year-to-date.

In the US, an agreement on the federal budget in March and confirmation of a recovery in the housing market has buoyed markets.  Both the Dow Jones Industrial Average and the S&P 500 indices are at all-time highs, with the S&P up 1.8% for the month and 12.0% year-to-date (lagging only Japan amongst major developed markets).  Although arguably overstated, the US’s sustained though lukewarm economic growth has made its equity and debt markets attractive destinations for investors who fear economic issues in other parts of the world.  US financial assets are likely to continue to do well with no major downside risks in the near term.

As mentioned in last month’s commentary, markets are overextended after the prolonged rally in the past few months.  However, many of the potential downside catalysts, fiscal deadlock in the US, a hard landing of the Chinese economy, and a meltdown of the Eurozone, appear to have been removed for the time being.  Also, Japanese injection of significant new monetary stimulus and the Eurozone’s potential switch away from austerity, would seem to indicate that markets have further to run.  The main things to watch for will be Japan’s ability to implement structure reforms and the Eurozone’s ability to develop a meaningful growth policy.