Macro Pulse Episode 32

Hello and welcome to Macropulse. The conflict between the US and Iran continues and the energy remains stuck in the Persian Gulf with the oil price now up almost 60% since the start of the year. Meanwhile, investors are bracing themselves for higher inflation, central bank rate hikes, and also slower growth. But despite all of this, equity markets has weathered the storm fairly well. The S&P 500 is close to record highs; it is up 16% from its March lows and 8% year to date. The Euro stocks is also up about 5% year to date. And the emerging markets are up 21% year to date.

So what’s driving this dislocation between the oil price and equities? Well, if we scratch below the surface, we’ll see that in both Europe and the US, less than 10 stocks makes up about 80% of the index returns year to date. And it’s predominantly energy as well as tech and AI related stocks that’s been the key drivers here. And within emerging markets, we see that Taiwan and South Korea has been the key contributors. The local Taiwan stock exchange is up about 45% year to date. And in South Korea, the stock index is up 80% year to date. And again, it is tech and AI related stocks that’s been driving the returns. Predominantly three stocks: TSMC, Samsung Electronics, and SK Hynix has been the key contributors here. In fact, if you look at all the tech stocks as well as the large consumer tech stocks, they’re now contributing 50% to the MSCI EM index, with Asia itself now contributing 80% to the MSCI EM index. So when we talk about EM outperformance, it is really Asia AI linked stocks that has performed really well.

So although Asia has been very much impacted by the negative oil shock, and in particular South Korea and Taiwan, which are big importers of oil from the Middle East, that negative impact has been offset by a large demand for microchips and technology which is shoring up their economies and driving returns. But not all countries has got these defenses.

If we look at economic data, we’ll see a large dispersion and divergence between different regions. In the US, we’ve had the first quarter GDP numbers come out at 2%. Slightly weaker than the 2.3% that was expected. But if we look below the surface, we’ll see that although it’s still at trend growth which is around 2%, it was again AI capex and AI investment spend that has been a key driver to these returns. Consumer spending has slowed down slightly over the last few quarters but it remains fairly resilient. But even here we think that there are some dynamics at play that is masking some underlying softening. Firstly, higher inflation provides nominal growth. Secondly, the struck down by the courts of the US tariffs have increased orders more recently. And then thirdly, we see that the tax cuts from the One Big Beautiful Bill Act has also provided some support to the consumer.

When we look at Europe, Europe is much more exposed to the energy crisis than the US, for instance. Not only is Europe more exposed, but we also heard from Christine Lagarde, the President of the ECB, that they would most likely hike rates at their next meeting in June which will put more pressure on consumers within the European nations.

The recent Fed meeting has also been a little bit more on the hawkish side with four out of 12 members dissenting: one member voting for an immediate cut and three members voted against the easing bias language in the statement. For now, the Fed remains on hold. Powell also sits out his term; his term would be expiring on the 15th of May. Kevin Warsh will be taking over and that transition itself could provide some volatility to markets.

In South Africa, we will have the SARB meeting at the end of May. And for now markets are pricing in a 25 basis points rate hike for that meeting and another two hikes after that, in the next 12 months. We also learned that the diesel and petrol price went up again this month. Diesel is now costing more than three rands a liter at the fuel pump which is 50% higher than the average price last year and putting pressure on consumers, and this will still have a lagging impact on overall economic activity in the country. Consumers are also adjusting their buying patterns. We saw very strong vehicle sales again and a larger portion of that is now consumers moving towards hybrid vehicle sales. So hybrid vehicle sales in the country is also picking up quite rapidly and globally supply chains are starting to move as a result of the war and the impact of that on energy markets.

The UAE, for instance, has exited OPEC Plus last week. And the question is who else, which other producers will follow and what will that mean for future oil production after the war? We also saw that the US energy exports or oil exports has risen to new highs. It used to be around 4 million barrels a day; it’s now sitting at 5 million barrels a day. In Brazil, we also saw that production picked up from about 3 and a half million barrels per day last year to now above 4 million barrels a day. And in Venezuela, we saw that oil exports have doubled now to 1.3 million barrels a day, a level last seen in 2018.

As we’ve said before, even if the war were to end tomorrow and the Straits of Hormuz were to reopen, it will take some time for energy flows to normalize and so the price of oil would remain high for a prolonged period. However, it does appear that the two sides are moving closer and that there are some form of an agreement potentially on the table. That agreement, a one page memorandum, contains just a framework for future talks, and those talks around nuclear, for instance, we will expect to only happen much later. So at best, we would likely see a gradual reopening of the Straits of Hormuz, and we will see the ceasefire continuing while the more difficult talks is still laying ahead of us.

That’s all for this week. Thank you for watching.