The month of June saw most local asset class returns end in the red, while international equities delivered generally positive returns as the global environment remained largely supportive. However, minor rand appreciation versus the US dollar and UK sterling during the month dented these returns. As in May, South African equity returns were hurt by foreign investor sales, a stronger rand and weakness in precious metal prices over the month, as well as low investor confidence and policy uncertainty. Global equities, meanwhile, were underpinned by the continuing revival in global trade and data showing steady economic growth in the US, the EU and China. The strong foreign investor demand for SA bonds seen in past months waned in June, weighed down by mounting negative sentiment.
Internationally, news was broadly investor-friendly. Although the S&P 500 and Dow Jones reached fresh record highs, investor enthusiasm dissipated towards the end of the month as gains started to look unsustainable. Tech stocks in particular came under pressure amid fears of a bubble. The US Federal Reserve hiked interest rates by 25bps at its June meeting, as widely expected, and continued to signal one further 25bp rate hike in 2017 and three more hikes for 2018, little changed from its (and the market’s) previous forecasts. It cited nearly full employment and rising inflation as two factors behind the rate rise, although May core CPI dipped to 1.4% y/y, which the Fed saw as a temporary aberration.
In the EU, the European Central Bank left its base interest rate unchanged, ruled out further rate cuts and said it was considering ways to gradually end its bond-buying stimulus. The UK saw a disastrous snap-election outcome for PM Theresa May as her Conservative party lost its majority – forcing her to soften her negotiating stance on exiting the EU (Brexit). Amid Brexit uncertainty, UK growth softened and sterling continued to weaken, spurring higher inflation. And in China, Moody’s announced a shock one-level downgrade to the country’s sovereign credit rating to A1 from Aa3, citing worries over the government’s ability to de-leverage the financial system’s high debt levels while maintaining steady growth. However, government officials discounted this concern, with Q1 GDP growth above expectations at 6.9% and financial markets continuing to enjoy robust returns.
Looking at global equity market returns, the MSCI World Index (for developed countries) returned 0.4%.
As for commodities, the price of Brent crude oil fell another 4.8% in June as a surge in US shale oil production offset lower OPEC supply.
In South Africa, June saw Moody’s downgrade the country’s sovereign credit rating by one notch from Baa2 to Baa3, just above sub-investment grade status, with a negative outlook indicating that a further cut is likely. The economy also unexpectedly moved into a technical recession with Q2 GDP growth announced at -0.7% (following -0.3% in Q1), and SA’s Q2 business confidence fell to its lowest level since 2009
Some good news emerged when both S&P Global and Fitch refrained from further downgrading SA’s credit rating on 1 and 2 June, although these foreign currency ratings are at sub-investment grade. May inflation also remained relatively low at 5.4% y/y from 5.3% y/y in April.
The only positive local investment performances in June came from cash (the STeFI Composite Index returned 0.6%) and SA listed property with a 0.3% return. The FTSE/JSE All Share Index returned -3.5% for the month, hit by weakness across most sectors. The rand, meanwhile, gained another 0.6% against the US dollar due to foreign demand and dollar weakness, and also appreciated 0.1% against sterling amid UK election-based jitters. It depreciated 0.7% against the euro in June, however.
The average multi-asset high equity (balanced) fund delivered -1.8%, while multi-asset low equity funds averaged -0.7%, and multi-asset income funds returned 0.5% on average
Adapted article by Pieter Hugo – Prudential Asset Managers