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 Emerging Market 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.

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.

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.

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 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.

Article by Pieter Hugo – Prudential Asset Managers