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.
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.
Generally bullish sentiment saw US stock indices reaching fresh record highs.
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 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.
Article by Pieter Hugo – Prudential Investment Managers