Elections in Egypt, the European Union, India and South Africa dominated events during the month of May; a highly positive result in India contrasted with increasing unhappiness amongst the electorate in the other three regions.  At the same time, geopolitical tensions continued in the Ukraine and the South China Sea where China is starting to assert its territorial claims by force.  However, the markets continue to take such geopolitical hiccups in stride, with positive investor sentiment and ample investors continuing to drive already expensive equity and bond markets ever higher.

Despite a relatively mediocre earnings season, stocks continued to grind higher, with the MSCI World up +1.6% on the month and +3.3% YTD.  Almost all major markets contributed to the advance as investor sentiment recovered following a spell of market volatility due to a technology sector sell-off and Russia’s intervention into the Ukraine during March and April.  A decline in government bond yields contributed to the positive sentiment, with yields on 10-year US Treasuries and German Bunds falling to 2.48% and 1.36%, respectively, from 2.65% and 1.47%, respectively.  Brent crude oil was up +1.2% for the month (though is still down -1.3% YTD).  Gold, on the other hand, suffered a -3.2% decline in May as investors dumped the bullion due to the continued improvement in sentiment.

As widely predicted, South Africa’s ruling African National Congress (ANC) won another 5-year term in power with 62% of the vote; this is the lowest share the ANC has obtained since free elections began in 1994 but is still a solid majority.  Re-elected President Zuma appointed a large, unwieldy 36-person cabinet (with 37 deputies); this is seen to be placating different constituencies within the ANC rather than appointing an efficient government.  On the positive side, a well-regarded technocrat, Nhlanhla Nene, was promoted to become finance minister.  Nevertheless, the lack of reform is continuing to stall the economy; GDP growth was negative in the first quarter (-0.6%), primarily due to the ongoing strikes at the country’s platinum mines since January (mediation attempts have been unsuccessful so far). See: South Africa’s low-growth road.  This did not stop the JSE All Share index from temporarily surpassing the 50,000 mark during May, an all-time record (see JSE All-Share hits 50,000).  The index was up +1.6% on the month and +8.8% YTD, as the country has benefited from the devaluation of the rand currency over the course of the past year.

Further north, terrorist group Boko Haram killed over a hundred people in bomb attacks in Nigeria; this comes a month after they abducted 270 schoolgirls.  The government has struggled to effectively counter this insurgency, hurting its credibility amongst the populous.  The Nigeria All Share index nevertheless benefited from recovering investor sentiment towards emerging markets after a difficult start to the year.  The index was up +7.8% in May but only +0.4% YTD (though the index has doubled since the beginning of 2012).

Former defence minister Abdel Fattah al-Sisi won Egypt’s presidential election with a landslide 96% of the vote.  However, a boycott by the opposition Muslim Brotherhood contributed to a relatively low turnout, hurting al-Sisi’s legitimacy.  More problematically, the new president largely ignored crucial issues on the campaign trail like improving government services.  The electorate has remained supportive on the hopes that al-Sisi will stabilise the country after the chaotic rule of the Muslim Brotherhood government of deposed president Mohamed Morsi.  The EGX 30 index declined -0.2% in May, but this is after a +21.5% run-up YTD on the hopes of al-Sisi’s election.

In Asia, Japan’s economy grew by +5.9% annualised in the first quarter (see Japanese growth hits 5.9%).  Though this is in part due to a consumer binge in advance of a hike in the consumption tax rate, exports and business investment also topped expectations.  After dabbling into pro-nationalist policies over the past year, Prime Minister Shinzo Abe’s government seems to have refocused on making much needed economic reforms.  This process will take time for the economy to adjust to the new policy regime, and the stock market rally had gotten ahead of the economic reality.  The Nikkei 225 index is down -10.2% YTD but recovered +2.3% in May.

Neighbour China has increased provocations in the South China Sea by moving a drill rig into waters claimed by Vietnam and by beginning construction work on an atoll claimed by the Philippines.  This is in part due to China flexing its increasingly strong military capabilities and in part serves as a popular distraction for the public as the country embarks on a difficult transition from an export-led to a consumption-led economy.  The country’s stock market has struggled since the financial crisis; after peaking at over 6,000 in 2007, the Shanghai Composite index has been stuck at around the 2,000 level over the past year and a half.  The index was up +0.6% in May though is still down -3.6% YTD.

Thailand’s military launched a coup that deposed divisive Prime Minister Yingluck Shinawatra after the latter refused to hold a referendum on recent political reforms (which favoured her constituents) that led to widespread street demonstrations (see Thailand’s coup).  The current military takeover may well be lengthier than the last one in 2006, which lasted for a year.  The military will likely want to see through a reform of the political system as well as a potential change in the monarchy (the present king is ailing and his successor is not popular).  For the time being, the coup is widely supported as a means to end the political paralysis.  The SET index was up +0.1% in May and +9.0% YTD.

Further west, election results in India proved even better than reformers had hoped; with a high 66% turnout, the electorate gave the BJP Party led by Narenda Modi an absolute majority the lower house of parliament (see Promising the good times in India).  India has led the emerging market comeback this year after a difficult 2013 when the rupee currency suffered a sharp drop; the SENSEX index temporarily cross over the 25,000 mark for the first time to hit a record high.  The index finished May up +8.0% and is up +14.4% YTD.  Modi has formed a government quickly and relatively effectively, including coalition partners into the cabinet to woo support, which will be needed to pass legislation.  After seeing GDP growth slump to +4.7% in fiscal 2014, the worst slowdown in a quarter of a century, many hope that Modi will be able to revive the country’s economic prospects (see India FY14 growth at 4.7%).

In the Ukraine, billionaire Petro Poroshenko, who made his fortune in chocolate, was elected as the new president in a relatively credible election (see Ukraine’s two-tone election).  Russia itself is now feeling the effects of its takeover of the Crimea region of the Ukraine.  Russia’s economy slowed to a +0.9% annualised growth rate in the first quarter.  The International Monetary Fund also slashed its growth estimate for Russia for 2014 to +0.2% compared to its forecast at the beginning of the year of +1.9% (see Russia confirms sharp fall in growth).  Indeed, Russia signed an energy agreement with China to supply gas for 30 years on relatively attractive terms for the Chinese; this may be a sign that Putin recognises the needs to diversify the country’s revenue stream.  The MICEX index recovered +9.6% in May though is still down -4.7% YTD.  RisCura travelled to both Ukraine and Russia in June to assess potential global ramifications of this feud which we will comment on in more detail next month.

Overall, European GDP growth is recovering but two-paced (see Eurozone growth misses forecast).  Whereas the Danish, Dutch, French, Finnish, and Portuguese economies all stalled or shrank, the German and UK economies both grew by +0.8% in the first quarter, the fastest rate since 2011.  The UK’s unemployment rate fell to 6.8%, a five-year low, leading to wages outpacing inflation for the first time since 2010.  The still anaemic growth in the Eurozone has prompted speculation (which proved correct) that the European Central Bank (ECB) will cut interest rates at its next meeting in June.  Stock markets in Europe were largely up in May, with France’s CAC 40, Germany’s DAX 30, and the UK’s FTSE 100 up +0.7%, +3.5% and +1.0%, respectively, on the month.

In the Americas, strikes and demonstrations over pay continued in Brazil ahead of the World Cup in less than a month’s time.  President Dilma Rousseff’s lead in polls for the upcoming election in October has shrunk from 23% a couple of months ago to 10%, and there is now a realistic chance for an upset (see Brazil’s president and pretenders).  A poor showing by the national football team at the World Cup would likely exacerbate public unhappiness and highlight the significant cost to the country of hosting the tournament (rather than investing in much needed infrastructure).  The Bovespa index was down -0.7% on the month and is down -0.5% YTD.

US GDP growth was an anaemic +0.1% in the first quarter (see Europe grows faster than the US).  However, this was due to a bitterly harsh winter, and the economy seems to have picked up again in the second quarter so far.  The S&P 500 index was up +2.1% in May and +4.1% YTD.

As mentioned in recent months’ commentaries, equities in general have outpaced their underlying earnings growth, leading to fairly expensive valuations.  A potential rate cut in June by the ECB (this has subsequently happened) as well as reforms in the Italian, Japanese and Indian economies may help to continue the rally, especially as there is still substantial liquidity in the markets due to quantitative easing.  However, corporate earnings will likely need to improve to truly sustain the rally medium term.  In addition, geopolitical tensions in the Ukraine and the South China Sea may continue to cause bouts of volatility in the markets, as should the series of elections taking place later this year in Brazil, Indonesia, Turkey and the United States.

Sources:  RisCura, Bloomberg, CNN, Fin24, The Economist

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