Market Overview: October 2017
Investors benefited in October from the extension of the long bull run in global equity markets, as many developed equity markets continued to hit fresh record highs and emerging markets also resumed their good gains after a lull in September. Market fundamentals remained positive, including generally stronger-than-expected corporate earnings, accelerating economic growth, and still-low inflation and interest rates. By contrast, interest-rate-sensitive assets like bonds and listed property lost ground amid the reflationary environment, with forecasts for tightening monetary policy being reinforced by the data. In South Africa, equities got a much-needed boost from the weaker rand and further rises in resources shares during the month, but the negative implications for economic growth, interest rates and the sovereign credit rating arising from the Medium-Term Budget Policy Statement cast a shadow on bonds and the rand, both of which sold off in the month.
In the US, stronger-than-expected earnings from various sectors, and in particular tech stocks, helped propel all three major equity indices to fresh record highs in October, combined with brighter prospects for successful tax reform and growth. US Q3 GDP growth estimates came in at 3.0% (q/q annualised), much higher than the 2.5% market consensus, as the economic toll from the series of September hurricanes proved less severe than anticipated. In addition, markets awaited the US Federal Reserve’s November FOMC meeting, where it was widely believed interest rates would be left on hold until December. US CPI for September rose to 2.2% y/y largely on the back of higher energy prices (core CPI excluding food and energy was 1.7% y/y). Also highly anticipated was the Trump administration’s choice for the next Fed Governor, set to be announced in the first week of November, with the decision too close to call.
Meanwhile, in Europe the European Central Bank started its road to a more normalized monetary policy by announcing its plans to reduce (or taper) its bond buying programme by half, starting in January. The full stimulus is no longer necessary given rising inflation and solid growth forecasts for the region, although ECB Governor Mario Draghi was careful to emphasize the continued need for “ample” economic stimulus in the form of low interest rates and ongoing (but reduced) bond purchases. In the UK, Q3 retail sales growth slumped to 1.5% y/y, its lowest in four years, as uncertainties around Brexit gathered force, while the weaker pound continued to drive inflation higher (September CPI rose to 3.0% y/y from 2.9% in August). Consensus grew for the Bank of England to hike its base interest rate in early November despite the softer economy. In Japan, the snap election called by Prime Minister Abe for 22 October resulted in a landslide victory for his governing coalition, stoking bullish sentiment for stocks and paving the way for continued growth stimulus measures under his “Abenomics” banner. In China, the government and the central bank were focused much of the month on maintaining financial market stability during the Communist party conference. Strong manufacturing data supporting the country’s continuing growth momentum helped keep markets optimistic, while pushing global metals prices higher. However, concerns remain about the impact of government deleveraging efforts to come, as it continues to try to reduce indebtedness throughout the economy.
Looking at global equity market returns (all in US$), the MSCI World Index (for developed markets) returned 1.9% in October, underperforming the MSCI Emerging Markets Index at 3.5%). Among developed markets, the S&P 500 returned 2.3% and the Dow Jones Industrial 4.4%, while the tech-heavy Nasdaq delivered 4.6%. In Europe, the Dow Jones EuroStoxx 50 posted a muted 0.8%, but France’s CAC 2.0% and Germany’s DAX 1.6%. The UK’s FTSE 100 returned a subdued 0.9%. Japan’s Nikkei was the best performer for the month with a 7.1% return. Among larger emerging markets in US$, the MSCI South Korea was the strongest performer with a 7.9% return, followed by the MSCI India with 7.4%. The MSCI China also continued its winning streak, delivering 4.0%. The worst performance came from Brazil’s Bovespa with -3.3%. Global bonds and listed property were again weaker in October on the back of rising inflation and prospects for higher interest rates: the Barclays Global Aggregate Bond Index (US$) returned -0.4% and the EPRA/NAREIT Developed Global Property Index (US$) returned -0.4%.
As for commodities, the price of Brent crude oil rose another 6.7% in October (after 9.9% in September) to just over US$60 per barrel at month end. Although gold fell 0.7% as risk-aversion waned somewhat, palladium was up 4.5% and platinum rose 0.8%. Industrial metals were also broadly stronger over the month: nickel was up 17.7%, zinc 3.6%, copper 6.0%, and aluminium 3.0% higher.
In South Africa, the 25 October Medium-Term Budget Policy Statement (MTBPS) proved to be a major market-moving event: the surprisingly negative budget shocked markets with its sharp downward revisions to expected growth and revenue collections, and its much-higher projected debt levels in all the out-years to 2021 and beyond. The lack of a plan to halt the deterioration also further alarmed investors and undermined confidence. Most analysts now fully expect credit rating downgrades on 24 November when Moody’s and S&P Global are set to announce the results of their latest reviews. Should the country’s local currency credit rating fall below investment grade, South Africa will fall out of the World Government Bond Index (WGBI) and certain foreign investors will be forced to sell their bond holdings. Bonds and the rand weakened sharply on the poor budget news, as did interest-rate-sensitive stocks like banks and retailers, while rand-hedge stocks gained ground. The rand had already been depreciating against the major currencies for much of October (particularly the US dollar, in anticipation of higher interest rates there). For the month, the rand lost 4.9% versus the US dollar, 3.6% against the pound sterling and 3.3% versus the euro.
Meanwhile, SA inflation ticked up to 5.1% y/y in September from 4.8% in August, mainly driven by the weaker rand and higher energy costs. Combined with the MTBPS’s forecasted surge in debt levels, most analysts now believe the window for further interest rate cuts has passed. This worsening outlook helped drive SA nominal bond yields higher (and prices lower) as the BEASSA All Bond Index returned -2.3% for the month, while inflation-linked bonds (Composite ILB Index) produced -0.6%. Cash as measured by the STeFI Composite Index returned 0.6%. SA listed property still managed to deliver a 2.0% return (despite losing 1.4% in the second half of October). The FTSE/JSE All Share Index hit new record highs, closing at around 58,980 on 31 October and returning a strong 6.3% for the month. The Index has now returned 19.6% so far this year. This was mainly on the back of the weaker rand (which lifted the earnings and share prices of large rand-hedge shares) and stronger resources shares. Financials also managed to gain 2.5% in October thanks to a solid performance in the first two weeks of the month.
According to Morningstar data, the average ASISA SA general equity fund returned 5.2% for the month. The average multi-asset high equity (balanced) fund delivered 3.9%, while multi-asset low equity funds averaged 2.2%, and multi-asset income funds returned 0.5% on average.