July was a month of positive returns across most asset classes, both local and offshore, with offshore gains enhanced by rand weakness during the month. Global equity markets rallied buoyed by continued positive prospects for global economic growth and company earnings. In line with other emerging market performances, South African equities reached a new high at month-end (the FTSE/JSE ALSI hitting 55,367 points on 31 July). The local market was underpinned by strong returns from resources stocks amid rising commodity prices, and large rand-hedge shares on the back of the weaker rand, as well as gains in dual-listed companies.
Internationally, although data showed some moderation in US and UK economic growth over the month and going forward, other economies including the Eurozone, Japan, China and Canada were accelerating to fill the gap. Continued robust investor risk appetite supported equity gains in most markets, with the S&P 500 reaching fresh record highs and companies generally reporting stronger-than-expected earnings growth. As expected, the US Federal Reserve kept interest rates unchanged at its July meeting, adopting what was interpreted to be a slightly more dovish tone regarding the path of interest rates. This helped push the US dollar weaker against other major currencies, particularly the euro. However, the Fed still highlighted its intention to start winding down its balance sheet (by selling bonds) soon, and another 25bp hike is still seen later in the year.
In the EU, the European Central Bank left its base interest rate unchanged again, although markets now expect a quicker end to accommodative monetary policy in 2018. And in China, Q2 GDP growth surprised to the upside at 6.9%, unchanged from Q1, with factory output boosted by global trade and higher domestic demand.
Looking at global equity market returns, the MSCI World Index (for developed markets) returned 2.4% in July. So far this year, emerging market equities have returned an impressive 25.8% compared to 13.7% from their developed counterparts.
As for commodities, the price of Brent crude oil gained 9.9% in July as OPEC curbs combined with lower US inventories and speculation over reduced supply from Venezuela to drive the price to US$52.65 per gallon at month end.
In South Africa, one of July’s highlights included the SA Reserve Bank’s surprise 25bp rate cut, its first in five years. The Bank cited much-improved inflation prospects as the main driver of its decision, but cautioned that it would be quick to hike again should inflationary risks rise from a weaker rand, further credit rating downgrades or elevated political uncertainty. While June CPI fell to 5.1% y/y from 5.4% y/y in May, the SARB lowered its economic growth forecasts to just 0.5% for 2017, 1.2% for 2018 and 1.5% for 2019.
The SARB rate cut and improved inflation outlook helped drive nominal bond prices higher as the BEASSA All Bond Index returned 1.5% for the month, while inflation-linked bonds (Composite ILB Index) eked out 0.2%. Cash as measured by the STeFI Composite Index returned 0.6% and SA listed property delivered a 3.7% return. The FTSE/JSE All Share Index returned a robust 7.0% for the month, propelled by a 13.3% return from Resources shares amid improving commodity prices. Industrial stocks returned 5.7%, driven by foreign earnings from the larger companies and the weaker rand. Finally, Financials delivered 5.0%, impaired partly by their local earnings focus against the backdrop of the weak SA economy. The rand, meanwhile, lost 0.8% against the US dollar (despite dollar weakness over the period), and also depreciated 2.3% against sterling and 4.2% against the euro in July.
The average ASISA SA general equity fund returned 5.0% for the month. The average multi-asset high equity (balanced) fund delivered 3.4%, while multi-asset low equity funds averaged 2.0%, and multi-asset income funds returned 0.8% on average.
Article adapted from Pieter Hugo – Prudential Asset Managers