Market Overview: November 2017
Propelled by improving global growth and corporate earnings, global equities continued their record-breaking run in November across several markets, ranging from the major US markets to the MSCI Asia Pacific and even including South Africa. US markets were additionally boosted by the increasing likelihood of tax cuts, as well as more dovish comments from US Federal Reserve chairman Janet Yellen, who cautioned against raising interest rates too rapidly for fear of “stalling” inflation below the targeted 2% level. The Fed left interest rates unchanged at its November FOMC meeting, as expected, while the market consensus still expects a 25bp rate hike in December. The appointment of Jerome Powell, already a well-known and dovish Federal Reserve Board Governor since 2012, to succeed Yellen in January reassured investors that Fed policy was not likely to change significantly going forward. Global bonds also gained ground, which analysts speculated could be due to ongoing strong demand for US Treasuries from foreign governments, as well as, paradoxically, investor concerns that growth could slow more than expected. Longer-dated yields on UST’s fell more than shorter-term securities and the yield curve (the difference between short-term and 10-year yields) fell to its flattest in over 10 years. This was despite US GDP growth being revised upward to 3.3% (q/q annualised) for Q3 compared to the advance estimate of 3.0%.
Looking at global equity market returns (all in US$), the MSCI World Index (for developed markets) returned 2.2% in November, outperforming the MSCI Emerging Markets Index at 0.2%. Among developed markets, the S&P 500 returned 3.1% and the Dow Jones Industrial 4.2%, while the Nasdaq delivered 2.1%. In Europe, the Dow Jones EuroStoxx 50 posted a subdued -0.5%, with France’s CAC also in the red at -0.3% and Germany’s DAX 0.7%. The UK’s FTSE 100 was absolutely flat with 0.0% as news over Brexit terms was gloomy one day and positive the next. Japan’s Nikkei was again the best performer for the month with a 4.3% return. Among larger emerging markets in US$, the MSCI South Africa was the strongest performer with a 9.0% return, followed by the MSCI Russia with 3.4%. The worst performances came from the MSCI Turkey with -7.9%, and Brazil’s Bovespa with -2.7%. Global bonds and listed property were stronger as the Barclays Global Aggregate Bond Index (US$) returned 1.1% and the EPRA/NAREIT Developed Global Property Index (US$) returned 2.8%.
Commodity prices were mixed. The price of Brent crude oil gained 3.6% in November to trade over $63.60 per barrel on the increasing likelihood of an extension in OPEC production curbs through the end of 2018 – it is now up 21.4% over the past three months. Gold and platinum gained 0.3% and 2.6% respectively, while industrial metals were broadly lower: aluminium fell 5.0%, zinc lost 4.4% and nickel was down 9.8%, but tin was up 1.0% and lead gained 2.8%.
In South Africa it was an eventful month, but returns were generally subdued for investors across local assets, while the stronger rand detracted from offshore returns. The long-awaited ratings agencies reviews resulted in downgrades from S&P Global, putting the country in sub-investment grade territory for local currency debt (lowered to BB+ from BBB-) as well as foreign currency debt (lowered further to BB from BB+). However, there was a reprieve from Moody’s, which placed the sovereign rating on downgrade review pending the outcome of the ANC Elective Conference and February 2018 Budget. This kept South Africa in the Citigroup World Government Bond Index and resulted in a temporary “relief rally” in local bonds and the rand towards month-end. Both had started the month much weaker on the back of the surprisingly poor fiscal outlook in October’s Medium-Term Budget Policy Statement. Worries grew during the month as reports surfaced that President Zuma was interfering in the budget process to institute free higher education, and Treasury’s budget head resigned. These sparked further bond sales, leaving the BEASSA All Bond Index with a return of -1.0% for the month. Inflation-linked bonds (Composite ILB Index) produced -3.0%, and cash as measured by the STeFI Composite Index returned 0.6%.
The rand, meanwhile, managed to gain against all three major currencies, appreciating 4.2% against a weaker US dollar, 2.4% against the pound sterling and 2.0% against the euro. In other significant developments, while SA’s October CPI fell to 4.8% y/y from 5.1% in September, the SARB left the repurchase rate unchanged at 6.75% at its November MPC meeting, citing higher inflationary risks from a rising oil price and a possibly weaker rand resulting from December’s ANC Elective Conference. Finally, helped by global enthusiasm, the FTSE/JSE All Share Index hit new record highs during the month, rising briefly to over 61,200 points before retracing much of its gains and closing November just below the 60,000 level. For the month, the ALSI returned 1.5%, thanks to a 4.4% return from Financials (boosted by the stronger rand and ratings news). Listed property returned 1.9%, Industrials delivered 1.4% (as large global companies were hurt by the stronger rand) and Resources were in the red with a -1.5% return, weighed down partly by lower commodity prices.
According to Morningstar data, the average ASISA SA general equity fund returned 1.4% for the month. The average multi-asset high equity (balanced) fund delivered 0.1%, while multi-asset low equity funds averaged -0.1%, and multi-asset income funds returned 0.2% on average.