Prudential Investment Managers

Prudential Investment Managers

August 2021

VIDEO: Market Snapshot July 2021

Our Market Snapshot provides an overview of key events that influenced financial markets over the course of July 2021.  

Developed equity markets were broadly positive in July, as investors shrugged off concerns over the potential economic impact of the more transmissible Delta variant. Renewed optimism following signs of positive economic growth (particularly in the US and Europe), together with better-than-expected corporate earnings, as well as continued support from central banks, helped buoy investor sentiment. However, emerging markets were weaker: Chinese tech stocks listed in the US posted their worst month since the 2008 Global Financial Crisis following a regulatory crackdown in Beijing. In South Africa, a strong run from the Resources sector helped carry the local bourse after miners posted strong earnings on the back of higher metal prices, largely offsetting the impact of the social unrest in parts of the country. It was the rand that felt the brunt of the negative sentiment, depreciating 2-3% versus major global currencies. 

Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 0.7% for the month. Developed markets outperformed emerging markets, with the MSCI World Index returning 1.8% and the MSCI Emerging Markets Index delivering -6.7%. The Bloomberg Barclays Global Aggregate Bond Index (US$) returned 1.3%, while the EPRA/NAREIT Global Property REIT Index (US$) produced 4.2%. 

The spot price of Brent crude oil closed the month 1.6% higher at around US$75 per barrel after the American Petroleum Institute reported consecutive weekly falls in US crude stocks, while the US Energy Information Administration raised its forecast for fuel demand in 2021. Turning to commodities, metals were broadly positive, with gold returning 3.8%, platinum -0.7%, copper 3.9%, palladium -1.3% and aluminium 4.0%. Nickel was among the top performers, increasing 7.8% for the month. 

US 

The US economy grew by an annualised 6.5% q/q in the second quarter of 2021, well below market forecasts of 8.5%, but still at a robust pace. Personal consumption (11.8%) and non-durable goods (12.6%) were among the largest contributors to GDP, as the number of vaccinated Americans engaging in economic activity continued to rise. 

Meanwhile, the Federal Reserve left the target range for its federal funds rate unchanged at 0-0.25% and its bond-buying programme at $120 billion in July. However, sentiment narrowed somewhat after the central bank suggested that it could start tapering its asset purchases given the progress being made towards economic growth, increased employment and inflation stability. Annual inflation accelerated to a new three-year high of 5.4% in June from 5% in May, largely due to a low base and sustained economic growth. Unemployment declined to 5.4% in July, the lowest level since the start of the pandemic and below market expectations of 5.7%. 

In other positive news, Manufacturing PMI posted a new record of  63.4 in July, supported by stronger output and new orders, while Non-Manufacturing PMI rose to 64.1 in July, well above market expectations of 60.5 and pointing to the steepest expansion on record in the service sector. 

Equities closed the month with the S&P 500 returning 2.4%, the Dow Jones Industrial 30 1.3%, and the technology-heavy Nasdaq Composite 1.2% (all in US$). 

SOUTH AFRICA 

Violent protests erupted in parts of KwaZulu-Natal and Gauteng after former president Jacob Zuma handed himself over to police to serve a 15-month prison term for failing to appear at the state capture inquiry. The unrest sparked some of the worst violence witnessed in South Africa since the 1990s, with the South African Reserve Bank (SARB) stating that the unrest is estimated to have fully negated the better growth results from the first quarter. Sentiment was further dented after rating agency Moody’s downgraded several of the country’s municipalities to junk status due to concerns over their financial positions. 

Meanwhile, the SARB kept its benchmark repo rate unchanged at a record low of 3.5% in July, largely in line with expectations. However, it signalled increases of 25bps in Q4 2021 and each quarter of 2022. The risks to the medium-term domestic growth outlook were assessed to be balanced, with GDP expected to grow by 2.3% in 2022 and 2.4% in 2023, unchanged since May and soothing fears of the severity of the impact from the protests. Meanwhile, headline CPI forecasts were revised marginally higher to 4.3% for 2021 (from 4.2%), and 4.2% in 2022 (from 4.4%). For June, CPI eased to 4.9% y/y from 5.2% the previous month. 

In more positive news, South Africa’s trade surplus widened to a record high of R57.68 billion in June, well above market forecasts of R52 billion, while the FTSE/JSE All Share index jumped towards historic highs around 69,500 at the end of July, largely on the back better-than-expected corporate earnings.  

The FTSE/JSE ALSI returned 4.2% in July. The standout performer was the Resources sector with 11.7%, as miners posted strong earnings on the back of a surge in metal prices. Listed Property returned -0.4%, Industrials 0.9% and Financials -1.2%. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned 2.6%. SA bonds were positive at 0.8% (as measured by the FTSE/JSE All Bond Index), SA inflation-linked bonds returned 0.5% and cash (as measured by the STeFI Composite) delivered 0.3%.  

Finally, the rand was weaker against the major currencies, depreciating 2.4% against the US dollar, 3.1% against the pound sterling and 2.4% against the euro. 

UK AND EUROPE 

In the UK, annual inflation increased to 2.5% in June from 2.1% in May, marking the highest reading since August of 2018, largely due to increased transport costs and a low base effect. Meanwhile, the unemployment rate edged up to 4.8% for the three months to May. In more positive news, the number of employees on British company payrolls surged by 356,000, the biggest increase since the start of the pandemic following the relaxation of the region’s lockdown restrictions. Meanwhile, the government partially lifted its travel ban after announcing that people who were fully vaccinated in either the EU or US would no longer need to isolate when entering the UK from an amber-list country. 

Elsewhere, the Euro Area economy expanded by an annualised 2.0% q/q for the three months to June, rebounding from a recession and beating market expectations of a 1.5% increase. The recovery was supported by the lifting of lockdown restrictions, efficient vaccination rollouts and ongoing fiscal support. Among the bloc's largest economies, Germany, France and Spain all returned to growth territory. Meanwhile, the European Central Bank revised its forward guidance on interest rates during its July meeting, stating that it expects interest rates to remain at their present levels or lower until inflation returns to 2%, while maintaining the pace of its asset purchases programme at €20 billion per month. Annual inflation increased to 2.2% in July from 1.9% in June, continuing its upward trajectory. 

For the month, the UK’s FTSE 100 returned 0.7%, the German DAX 0.1% and France’s CAC 40 1.6% (in US$). 

CHINA AND JAPAN 

Chinese tech stocks listed in the US posted their worst month since the 2008 Global Financial Crisis following more stringent regulations imposed by the Chinese government. Tencent was among the hardest hit after the market regulator barred the company from exclusive music copyright deals. The move came as part of Beijing’s recent crackdown after years of “soft” regulatory requirements on the technology sector, which saw private companies grow significantly in size and power. 

Meanwhile, the Chinese economy grew by a seasonally adjusted 1.3% q/q for Q2 2021, following a downwardly revised 0.4% advance in Q1. The People's Bank of China (PBoC) left its benchmark interest rates steady for the 15th straight meeting, despite expectations for a cut after the PBoC lowered banks’ reserve requirement ratio by 50bps, effectively releasing around CNY1 trillion to support the economic recovery. 

Turning to Japan, the Bank of Japan kept its key short-term interest rate unchanged at -0.1% during its July meeting, however, lowered its growth forecast for  2021 from 4% to 3.8%. The central bank expects the economy to recover moderately in 2022, revising its growth forecast higher from 2.4% to 2.7%. Meanwhile, inflation rose by 0.2% y/y in June on the back of increased consumption following an acceleration in Covid-19 vaccinations, marking the first consumer price inflation since August 2020. In other news, the government proposed a new scheme aimed at boosting funding for activities fighting climate change, which will offer banks long-term loans at zero interest. The scheme is expected to be launched later this year and will run until 2030. 

Japan’s Nikkei 225 delivered -4.2%, the MSCI China -13.8% and Hong Kong’s Hang Seng -9.7% (in US$).

 

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