Market Overview: September 2017
Global equities continued their march higher in September, putting together the best run in 20 years after recording six consecutive quarters of gains, propelled by a combination of accelerating global growth, still-easy monetary policy, subdued inflation and a weaker dollar (until recently). Although emerging market equities lost some steam in September, the MSCI All Country World Index, measuring 46 developed and emerging equity markets, reached record highs. South African equities lost ground, and the rand was sharply weaker, as local political uncertainty and a global investor shift toward US and other developed market assets sparked sales by foreigners and boosted the US dollar against most other currencies.
During the month, it was: 1) a rise in US August CPI to 1.9% y/y (above expectations and closer to the Federal Reserve Bank’s 2.0% target); 2) a clearly more hawkish tone from the Fed; and 3) speculation around the appointment of a more hawkish Fed Chairman than Janet Yellen, that were among the major reasons investors moved forward their expectations for the next 25bp interest rate hike to December. With rates anticipated to move higher sooner, US equities and the dollar became more attractive, prompting a move away from emerging market equities in particular. Similar rising inflation data from the UK and Eurozone, as well as further strengthening of the Eurozone economy, also led investors to expect quicker monetary tightening in these economies.
In the US, the Fed discounted damage to the economy from hurricanes Harvey, Irma and Maria as being of a short-term and relatively localized nature. Chairman Janet Yellen’s comments that it would be “imprudent” to keep monetary policy on hold until inflation reached the 2.0% target were widely interpreted as signaling another rate hike in 2017. Yellen also announced details of the Fed’s plans to unwind its $4.5 trillion balance sheet of bonds accumulated during quantitative easing (QE), starting from October. However, the FOMC’s September meeting showed the central bank still forecasts only three 25bp rate hikes in 2018, expecting ongoing steady growth and low unemployment to push inflation higher. US bond yields rose as a result of the Fed’s somewhat more aggressive stance. At the same time, equities were supported, and US bonds hurt, by growing optimism over a growth boost from likely tax cuts under the Republican administration. Generally bullish sentiment saw US stock indices reaching fresh record highs.
Meanwhile, Eurozone CPI at 1.5% in August was also higher than expected, due mainly to rising energy prices, as growth forecasts were revised further upward and the euro gained more ground – the currency is 13% stronger against the US dollar so far in 2017. Manufacturing PMI data for September in both France and Germany came in the highest in six years. In the UK, despite a weaker economy, August CPI accelerated to 2.9% y/y, above the 2.8% expected, largely on the back of the weaker pound – investors now see the chances of an interest rate hike before year-end as much higher. At its September meeting, the Bank of England said its concerns over inflation now outweighed those over Brexit-related risks to the economy. In China, the upcoming Communist party conference in October meant government and the central bank were focused on maintaining financial market stability. Notably, S&P downgraded the country’s credit rating one notch to A+ from AA-, citing the “soaring debt burden” and following Moody’s downgrade in May. Although September manufacturing PMI rose to 52.4 from 51.7 in August, its fastest since 2012, analysts expect a small slowdown in GDP growth in the third quarter of 2017.
Looking at global equity market returns, the MSCI World Index (for developed markets) returned 2.3% in September, beating the MSCI Emerging Markets Index at -0.4% (both in US$). Among developed markets, the S&P 500 returned 2.1% and the Dow Jones Industrial 2.2%, while the Dow Jones EuroStoxx 50 posted a robust 4.6% gain and Japan’s Nikkei 2.0% (all in US$). The UK’s FTSE 100 returned 3.2%, France’s CAC 4.3% and Germany’s DAX 5.7% (all in US$). Among larger emerging markets in US$, the MSCI Russia was the strongest performer in September with a 4.5% return, followed by Brazil’s Bovespa (4.2%), while the biggest losers were the MSCI Turkey (-9.5%) and MSCI South Africa (-6.3%). Global bonds and listed property were weaker in September on the back of rising inflation and prospects for higher interest rates: the Barclays Global Aggregate Bond Index (US$) returned -0.9% and the EPRA/NAREIT Developed Global Property Index returned -0.2% in US$. In rand terms, however, the returns were 2.9% and 3.6%, respectively, due to the weaker rand.
As for commodities, the price of Brent crude oil jumped 9.9% in September to around $56.70 per barrel at month end, driven by mounting signs that the three-year market oversupply is finally easing on the back of production cuts by OPEC and other producers. Gold lost ground, down 3.2% as fears over North Korea waned, while palladium was unchanged and platinum lost 8.7% on oversupply concerns. Industrial metals were mostly lower, impacted partly by the stronger US dollar: nickel was down 11.3% and copper lost 4.8%, while lead gained 5.3%.
In South Africa, a major September highlight saw the economy emerge out of recession with Q2 GDP growth of 2.5% (q/q annualised). This was led by a rebound in agricultural production, while manufacturing production and household spending were also higher. However, fixed capital formation was down 2.6% during the quarter, reflecting the ongoing decline in investment this year. Low confidence, slow growth and political uncertainty continue to weigh on businesses despite relatively low capital costs and the positive global environment. Despite the positive Q2 GDP data, several institutions further lowered their growth forecasts for SA, among them the World Bank (to 0.6% from 1.1% previously for 2017, 1.1% for 2018 and 1.7% for 2019). On another negative note, a reported R13 billion shortfall in government revenue collections sparked concerns National Treasury would miss its annual budget deficit target, not only raising the spectre of higher taxes in a weak environment, but also increasing the likelihood of further credit rating downgrades. Meanwhile, in a close decision the SARB refrained from lowering interest rates at its September MPC meeting; this despite August CPI coming in at 4.8% y/y, slightly higher than the 4.6% y/y recorded in July but within the SARB’s 4-6% target range. The SARB noted growing upside risks to inflation arising from the weaker rand, policy uncertainty, growing fiscal challenges and more possible downgrades.
The improving inflation outlook helped drive SA nominal bond prices higher (and yields lower) as the BEASSA All Bond Index returned 1.1% for the month, while inflation-linked bonds (Composite ILB Index) also produced 1.1%. Cash as measured by the STeFI Composite Index returned 0.6% and SA listed property delivered a 1.2% return. The FTSE/JSE All Share Index retreated from its August record highs, returning -0.9% for the month. Financials were the worst performers with a –1.9% return, followed by Resources with -1.1% and Industrials at -0.3%.Supported by the lower interest rate outlook, listed property managed to deliver 1.2% for the month. The rand, meanwhile, weakened fairly sharply against a resurgent US dollar (down 3.9%) and pound sterling (down 8.2%), as well as against a resilient euro (down 3.3%).
According to Morningstar data, the average ASISA SA general equity fund returned -0.9% for the month. The average multi-asset high equity (balanced) fund delivered 0.8%, while multi-asset low equity funds averaged 1.1%, and multi-asset income funds returned 0.8% on average.