April saw equity markets generally increase on lower bond yields.  While the economic news in developed markets is improving, equity valuations have outpaced earnings growth on the back of increased market sentiment.  Meanwhile, most emerging markets are slowing down but their currencies have largely depreciated to fair values, helping their economies.  The International Monetary Fund (IMF) is forecasting world GDP growth of +3.6% in 2014, with emerging markets stabilising (highlighted by an uptick in China’s growth from +7.2% to +7.5%), while faster growth in developed countries is led by the UK with +2.9%.  At the same time, the World Trade Organisation raised its forecast for growth in exports of goods to +4.7% this year and +5.3% in 2015 (+5.3% has been the average over the past twenty years).  Financial markets are rapidly normalising as central banks pull back their quantitative easing (QE) programmes.  Reaction to this reduction has also become more muted.  When the US Federal Reserve announced tapering of quantitative easing (QE) last May it led to carnage in bond markets and emerging markets.  However, more recently the Fed’s reduction of QE monthly bond purchases by a further $10bn (to $45bn) went largely unnoticed.  The MSCI World index was up +1.6% on the month (and up the same amount YTD), with the majority of developed and emerging markets up with the exception of China, Nigeria, Japan and Russia (though only the latter two suffered steep losses).

Brent oil was up +0.3% as stored supplies of oil are low in many regions.  Gold gained +0.6% in April, recovering some of its losses in March, though precious metals have generally been weaker than other commodities despite continued strikes at platinum mines in South Africa holding back supply.  Yields on 10-year US Treasuries and German Bunds decreased to 2.65% and 1.47%, respectively, from 2.72% and 1.57%, respectively, at the end of March.  Rates have declined significantly from December due to reduced fears of substantial interest rate rises in the medium term.

Russia’s infiltration of the Ukraine is increasingly having a bearing on markets.  Riots broke out across eastern Ukraine as pro-Russian militants have increased their control over parts of the region.  The Ukraine has had to respond with increasing force in order to reassert control. Fear of sanctions has caused Standard and Poor’s to downgrade Russia’s credit rating to one notch above junk status.  Russia’s central bank had to raise interest rates further to 7.5% from 7.0% in an effort to stem outflows and curtail inflation (+6.9% annualised).  The economy is now projected to grow no more than +0.5% this year.  The MICEX index was down -4.6% in April, taking its losses YTD to -13.1%.  As for the Ukraine, the economy is expected to decline by -5% this year, and the hryvnia currency is the world’s worst performing currency since the crisis began.  The country is currently negotiating a $17bn bailout from the IMF.

South Africa celebrated the 20th anniversary of its first multiracial elections.  The JSE All Share index closed near an all-time record (up +2.7% for the month and +7.1% YTD) due to a strong rally by consumer names like BAT, SABMiller and retailers as credit growth quickened to +8.8%pa in March.  This was despite the Association of Mineworkers and Construction Union (Amcu) rejecting the latest offer from the management of platinum mining companies and prolonging the strike into its 14th week.  Increased copper and iron ore production has more the compensated for the fall-off in platinum production though.  The rand has also remained stable along with other emerging market currencies after a sharp devaluation last year. This was despite the inflation rate increasing to +6.0%pa in March from +5.4% at the end of last year.

Further north, Nigeria revised its GDP figure upwards by +89% from 42.4 trillion naira to 80.2 trillion ($510bn).  This revision was long overdue (the last one was in 1990) and was necessary to reflect changes in the composition of the economy.  It makes Nigeria by far the largest economy in sub-Saharan Africa, surpassing South Africa.  Still, the majority of the population live on less than $1.25/day.  In addition, a bomb at a bus station killed at least 70 people; with Islamist extremist group Boko Haram likely the responsible party.  The Nigeria All Share index was down -0.7% in April (and -6.9% YTD).

In Asia, Japan increased its sales tax from 5% to 8%; some consumer-oriented companies have already blamed poor sales on the negative effect of the tax.  The country also signed a trade agreement with Australia after seven years of negotiations.  The treaty is important as it is the first to open the country up to imports from a major agricultural exporter, but it underwhelmed in the scale of tariff cuts.  The country’s trade deficit surged in March, fuelled by a +18.1% in imports, resulting in its worst ever trade deficit of $137bn.  The weakening yen has not yet led to a boost in exports (which grew by only +0.6%), while imports have surged due to the weaker yen and to higher energy imports after the country shut down its nuclear power plants in the wake of the Fukushima nuclear meltdown in 2011.  Prime Minister Shinzo Abe’s government announced that it will seek to restart at least a third of the country’s nuclear reactors as a consequence.  The Nikkei was down -3.5% on the month (and down -12.2% YTD, making it by far the worst performing developed market).

China’s economy grew at its slowest pace in two years during the first quarter, rising by +7.4% on an annualised basis, though the World Bank has adjusted its economic figures and now expects China to become the largest economy in the world this year on a purchasing power parity basis.  Thousands of workers at a shoe factory conducted one of the largest strikes in recent memory in the southern manufacturing hub of Dongguan.  Interestingly, the government allowed Western media to report on the strike (though not domestic media) as part of its efforts to gradually open itself up to greater transparency and outside scrutiny.  The Shanghai Composite index was down -0.3% on the month and is down -4.2% YTD.

The first of nine stages of voting in parliamentary elections began in India; the process will take until mid-May before results will come out.  The BSE SENSEX index was up +0.1% in April and is up +5.9% YTD.  The country’s markets have been buoyant on investor belief that the opposition BJP party will win.  But as Indonesia’s recent elections have shown, such predictions may prove misguided, and India’s fractured political system makes necessary economic reforms very difficult to implement.

Turkey’s two year benchmark bond yield fell to its lowest rate this year and the Borsa Istanbul index rose +5.9% on the month as market sentiment recovered following Prime Minister Erdogan’s party’s landslide victory in municipal elections.  The central bank is also hinting at an interest rate cut, despite a weak currency, high inflation (+8.4% annualised in March), and a large current account deficit (-6.0% of GDP).  However, this positive sentiment is perhaps misguided as Turkey’s large current account deficit may require the country to seek IMF assistance if investor portfolio inflows decrease.

In Europe, the new prime ministers of France and Italy, Manuel Valls and Matteo Renzi, both announced public spending and tax cuts in efforts to resuscitate their respective economies.  Both have very difficult hurdles to overcome in order to enact the reforms necessary to restructure their economies.  Valls would have to overcome significant opposition from within his own Socialist party and government, including the French president, while Renzi will likely call elections in the second half of this year in order to win a mandate to change the constitution to strengthen his ability to make such changes.  Nonetheless, Italian ten-year government bond yields have now dropped down close to 3% from over 4% at the start of the year and are half of what they were two years ago.  Meanwhile, Portugal’s latest issuance of ten-year debt was significantly oversubscribed; the country is likely to announce an exit from its 2011 IMF bailout next month.  Furthermore, Greece’s international lenders signed off on a €8.3bn tranche of bail-out money after a six month stand-off caused by the Greek government’s delays on economic reforms; this allowed the government to issue its first five year bonds into the capital markets (raising €3bn at less than a 5% interest rate) since the Eurozone crisis began in 2010.  The yields on ten-year government bonds briefly dropped below 6% after starting the year at 8.42% (they were 11.02% a year ago).  Eurozone economic sentiment remained strong in April after hitting a 32-month high in March.  Germany’s DAX 30, France’s CAC 40, Spain’s IBEX 35, and Italy’s FTSE MIB indices all booked solid gains for the month.  However, a word of caution; Greek gross government debt is still around 175% of GDP, while overall Eurozone debt to GDP is close to 100%; all of the peripheral countries (Greece, Italy, Portugal, Ireland, Spain and France) are either at this level or greatly exceeding it.

The UK’s unemployment rate fell to 6.9%, below the Bank of England’s former threshold for considering interest rate increases (the central bank had forecasted that it would take until 2016 for such a level of unemployment to be achieved).  The Bank of England has now stated that it will not consider interest rate increases until 2015 and will need to see sustained growth in output before it will take action.  The FTSE 100 gained +2.8% in April and is up +0.5% YTD.

Technology and biotechnology stocks in the US suffered a severe correction during the month in a continuation of the sell-off from March.  This is despite tech darlings Facebook and Google reporting large increases in revenues and profits (a 72% revenue increase in the case of Facebook).  GDP growth in the first quarter was anaemic at +0.1%, the worst in three years; this was mainly attributed to a bitterly cold winter, though business equipment investment, residential home construction, exports, and government spending all declined.  Nevertheless, the economy is strengthening, with retail sales up +1.1% in March, the fastest pace in 18 months, and several early indicators pointed to an accelerating economy in the second quarter.  The S&P 500 index was up +0.6% in April and is up +1.9% YTD.

As mentioned in recent months’ commentaries, equities in general have outpaced their underlying earnings growth.  There has been little to no earnings growth still in Europe, while the US is forecasted to only deliver +1.7% earnings growth for the first quarter (compared to +8.0% in the fourth quarter and +5.2% in the same period a year ago).  Conditions in emerging markets are improving, as devalued currencies are beginning to filter through into the competitiveness of those economies.  However, major emerging market elections in Brazil, India and Indonesia pose a fair amount of uncertainty.  Brazil’s incumbent president is now struggling in the polls, making the outcome more uncertain.  India’s markets are betting that its election will spark major economic reforms, but this would need to take place in a notoriously difficult country to govern.  Indonesia’s opposition now looks much less certain to come to power, throwing the country’s reform programme into doubt.

Furthermore, European parliamentary elections will take place in May and will likely see significant wins by anti-Europe parties, making it more difficult for the European Union to operate.  This comes at a time when there is increased uncertainty of how the Ukraine/Russia situation will unfold and has a real potential of derailing European recovery.

Sources:  RisCura, Bloomberg, US Energy Information Administration, The Economist.

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