May local commentary: The JSE ends down, with gold shares a rare bright spot

The South African (SA) bourse fell for the fourth time in six months (FTSE/JSE Capped SWIX Index -5.8% MoM), with the performance somewhat flattered by a weak local currency. When measured in US dollar terms, the JSE was the worst-performing major equity market in May (FTSE/JSE Capped SWIX Index -13% MoM in US dollar terms). The local retailers were amongst the worst-performing companies in May, with both the discretionary and general retailers experiencing double-digit aggregate share price declines during the month, caught between constrained consumers and rising costs, particularly those resulting from the need to generate their own electricity. Spar, Tiger Brands and Pick ’n Pay saw their market values fall by c. 25% in May as earnings announcements and trading updates laid bare the extent of the earnings damage.

Transaction Capital fell 43% MoM after releasing earnings, and it had the dubious honour of being the worst-performing share on the JSE for the month for a second time this year, having fallen by 60% in February when management initially alerted investors to the need for a major overhaul of its operations. Gold shares were a rare bright spot on the JSE (+3% MoM), supported by a weaker rand which more than offset a lower US dollar gold price (-1.4% MoM).

The local currency was the weakest major currency in May (-7.3% MoM), leaving it 13.5% lower against the US dollar YTD (only the Argentine peso has fared worse YTD: -25%). The currency weakness was primarily a function of plunging investor confidence as the government scrambled to defend itself against accusations by the US ambassador that SA had supplied weapons to Russia. The government’s cost of borrowing also spiked, with the 10-year government bond yield rising by more than 1% during the month to 12.4%, matching the level seen at the depth of the initial COVID-19 panic in March 2020.

The South African Reserve Bank (SARB) added to consumer woes with a much anticipated 0.5% hike in interest rates. This was the tenth consecutive rate hike for SA, which has seen rates rise by 4.75% over the past 18 months. The hike came despite clear signs of economic weakness, with the latest retail sales data (-1.6% YoY) worse than anticipated. Nevertheless, the SARB remains under pressure to cool inflation, with the latest inflation data (core inflation +5.3% YoY) still comfortably above the SARB’s 4.5% target level, with risks to the upside from the currency weakness.

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