South Africa ends the second quarter of the year on a positive note, as investors welcomed the results of the country’s general elections which saw the African National Congress Party and Democratic Alliance, along with a number of smaller parties, form a coalition “Government of National Unity”.
South Africa's economy contracted by 0.1% quarter-on-quarter, disappointing market expectations and marking a slowdown from the 0.3% growth in the previous quarter. Key sectors such as manufacturing, mining, and construction were major contributors to this decline, largely due to persistent power outages known as loadshedding.
Despite these challenges, the South African Reserve Bank maintained the repo rate at 8.25% in line with expectations, citing balanced inflation risks. Annual inflation held steady at 5.2% in May, consistent with April's figure and slightly lower than the 5.3% reported in March. On a more positive note, mining production rebounded in April, increasing by 0.7% following a significant decline in the previous month.
US
In Q2, US shares saw gains driven by the information technology and communication services sectors, boosted by ongoing enthusiasm for AI-related companies which reported strong earnings and positive outlooks. Conversely, the materials and industrials sectors showed weakness during the period.
Market attention remained focused on potential interest rate cuts, amid concerns of overheating in the US economy, although strong economic data initially sparked market apprehension. US inflation slightly eased to 2.6% in May from 2.7% in April instilling optimism as the quarter progressed.
Euro
Meanwhile in the Eurozone shares faced downward pressure amidst uncertainties surrounding upcoming parliamentary elections in France and reduced expectations for significant interest rate cuts. The information technology sector, showed an improved performance however, the consumer discretionary sector experienced declines.
The European Central Bank implemented a 25 basis points interest rate cut in early June, yet prospects for further cuts were tempered by persistent inflationary pressures. Annual inflation in the euro area rose to 2.6% in May from 2.4% in April.
UK
UK equities surged, with the FTSE 100 reaching new record highs. The Bank of England retained its base interest rates at 5.25%, despite the UK economy rebounding strongly with a 0.7% GDP growth in Q1 2024 following a mild recession. Although the annual consumer price index inflation fell to 2.0% in May, aligning with the Bank's target for the first time since July 2021, concerns persisted that the drop in inflation might be temporary due to high wage inflation, which contributed to a persistent 5.7% inflation rate in services by May.
Emerging Markets:
Meanwhile the emerging market (EM) equities outperformed their developed counterparts. Concerns about the timing of US interest rate cuts were alleviated by softer US macroeconomic data, while a rebound in China further bolstered EM returns. Turkey emerged as the top performer during the quarter, driven by optimism surrounding continued orthodox economic policies. Taiwan also posted strong double-digit returns in US dollar terms, fuelled by persistent investor enthusiasm for technology stocks, particularly those related to artificial intelligence.