Market Overview: August 2017
Global financial markets extended their bull run in August, with the South African market also buoyed by the positive risk-on sentiment, although enthusiasm was dampened by the prevailing political uncertainty. Rand strength during the month dented offshore returns. Although developed equity markets lost some steam, US markets still hit new highs. Their emerging counterparts also saw continued impressive gains, marking the longest EM stock rally since 2004. This came amid renewed optimism over global growth, thanks to positive growth data from the US, China and Europe in general. South African equities moved into fresh record territory as the FTSE/JSE ALSI breached the 56,000 level, underpinned by strong returns from resources stocks amid rising commodity prices. However, by month end analysts were sounding the alarm over increasing signals that the long global equity market rally was nearing its last stages.
Internationally, one of the economic highlights was the revision of US Q2 GDP growth significantly upward to 3.0% (q/q annualised) from its previous 2.6% estimate, on the back of higher household spending and business investment. However, July CPI came in softer than expected at 1.7% y/y (versus 1.6% y/y in June), leading to speculation that the US Federal Reserve would be less aggressive in its interest rate hiking path later this year. This growth optimism boosted the US dollar, although this was mitigated to some extent by rising political worries late in the month over North Korea and hurricane Harvey, both of which fueled gains in the gold price. Meanwhile, growth in the Eurozone also accelerated to 2.1% (q/q annualised) in Q2 from Q1’s 1.9%, backed by a broad recovery in domestic demand from many euro-area countries, and helped by the European Central Bank’s ongoing easy monetary policy. By contrast, it was revealed that the UK was growing at roughly half the pace of its EU neighbours, with the stalemate in negotiations over Brexit terms and rising uncertainty hampering investment. The weaker pound over the month continued to drive up the cost of imports and inflation. In China, there was more positive news as manufacturing continued to expand, spurred by higher global trade and domestic demand: August PMI rose to 51.7 from 51.4 in July, defying expectations of a slowdown. This sparked gains in industrial metal prices like copper.
Looking at global equity market returns, the MSCI World Index (for developed markets) returned 0.1% in August, underperforming the MSCI Emerging Markets Index at 2.2% (both in US$). Among developed markets, the S&P 500 returned 0.3% and the Nasdaq 2.0%, while the Dow Jones EuroStoxx 50 eked out 0.1% and Japan’s Nikkei returned -1.1% (all in US$). The UK’s FTSE 100 returned -0.6%, France’s CAC 0.4% and Germany’s DAX 0.1% (all in US$). Among larger emerging markets in US$, the MSCI Russia was the strongest performer in August with an 8.1% return, followed by Brazil’s Bovespa (6.9%), the MSCI Turkey (4.6%), the MSCI China (4.2%) and the MSCI South Africa (3.9%). South Korea’s Kospi 200 lost 2.2% amid worries over North Korea, while the MSCI India lost 0.8%. Global bonds and listed property also gained ground in August as the Barclays Global Aggregate Bond Index (US$) returned 1.0% and the EPRA/NAREIT Global Property Index returned 0.1% in US$. In rand terms, however, the returns were -0.5% and -1.4%, respectively.
As for commodities, the price of Brent crude oil fell 0.5% in August, with the price only marginally changed at around US$52.50 per barrel at month end. Precious metals gained ground with gold up 4.1%, palladium gaining 4.6% and platinum rising 6.2%, while industrial metals were also positive: nickel was up 15.5% (32% higher over three months), zinc rose 12.8%, copper was 6.7% stronger, and aluminium 10.7% higher.
In South Africa, good news came in the form of a sharp drop in July consumer inflation to 4.6% y/y from 5.1% y/y in June, on the back of slowing increases in food and electricity prices and a drop in fuel prices. Core inflation (excluding food and energy prices) also fell to 4.7% y/y from 4.8%. This paved the way for mounting expectations of another 25bp interest rate cut from the SARB as soon as September. At the same time, SA’s trade surplus improved to a better-than-forecast R8.9 billion in July, although private sector credit extension slowed to 5.7% y/y in July from 6.1% in June, a further sign of the weak economic conditions.
The improving inflation outlook helped drive nominal bond prices higher (and yields lower) as the BEASSA All Bond Index returned 1.0% for the month, while inflation-linked bonds (Composite ILB Index) eked out 0.2%. Cash as measured by the STeFI Composite Index returned 0.6% and SA listed property delivered a 0.8% return. The FTSE/JSE All Share Index returned 2.6% for the month, lifted by a 5.1% return from Resources shares spurred by improving commodity prices. Industrial stocks returned 2.0% and Financials delivered 2.1%. The rand, meanwhile, gained 1.5% against the US dollar, 3.7% versus a much weaker pound sterling, and 0.7% against a resilient euro in August.
According to Morningstar data, the average ASISA SA general equity fund returned 1.8% for the month. The average multi-asset high equity (balanced) fund delivered 0.8%, while multi-asset low equity funds averaged 0.6%, and multi-asset income funds returned 0.7% on average.