Market Overview – October 2017

Investors benefited in October from the extension of the long bull run in global equity markets, as many developed equity markets continued to hit fresh record highs and emerging markets also resumed their good gains after a lull in September.

Market fundamentals remained positive, including generally stronger-than-expected corporate earnings, accelerating economic growth, and still-low inflation and interest rates. In South Africa, equities got a much-needed boost from the weaker rand and further rises in resources shares during the month, but the negative implications for economic growth, interest rates and the sovereign credit rating arising from the Medium-Term Budget Policy Statement cast a shadow on bonds and the rand, both of which sold off in the month.

In the US, stronger-than-expected earnings from various sectors, and in particular tech stocks, helped propel all three major equity indices to fresh record highs in October, combined with brighter prospects for successful tax reform and growth..

Meanwhile, in Europe the European Central Bank started its road to a more normalized monetary policy by announcing its plans to reduce (or taper) its bond buying programme by half, starting in January. The full stimulus is no longer necessary given rising inflation and solid growth forecasts for the region, although ECB Governor Mario Draghi was careful to emphasize the continued need for “ample” economic stimulus in the form of low interest rates and ongoing (but reduced) bond purchases.

In the UK, Q3 retail sales growth slumped to 1.5% y/y, its lowest in four years, as uncertainties around Brexit gathered force, while the weaker pound continued to drive inflation higher

In China, the government and the central bank were focused much of the month on maintaining financial market stability during the Communist party conference. Strong manufacturing data supporting the country’s continuing growth momentum helped keep markets optimistic, while pushing global metals prices higher. However, concerns remain about the impact of government deleveraging efforts to come, as it continues to try to reduce indebtedness throughout the economy.

Looking at global equity market returns, the MSCI World Index (for developed markets) returned 1.9% in October, underperforming the MSCI Emerging Markets Index at 3.5%). The UK’s FTSE 100 returned a subdued 0.9%.

In South Africa, the 25 October Medium-Term Budget Policy Statement (MTBPS) proved to be a major market-moving event: the surprisingly negative budget shocked markets with its sharp downward revisions to expected growth and revenue collections, and its much-higher projected debt levels in all the out-years to 2021 and beyond. The lack of a plan to halt the deterioration also further alarmed investors and undermined confidence.

Most analysts now fully expect credit rating downgrades on 24 November when Moody’s and S&P Global are set to announce the results of their latest reviews. Should the country’s local currency credit rating fall below investment grade, South Africa will fall out of the World Government Bond Index (WGBI) and certain foreign investors will be forced to sell their bond holdings. Bonds and the rand weakened sharply on the poor budget news, as did interest-rate-sensitive stocks like banks and retailers, while rand-hedge stocks gained ground.

The rand had already been depreciating against the major currencies for much of October (particularly the US dollar, in anticipation of higher interest rates there). For the month, the rand lost 4.9% versus the US dollar, 3.6% against the pound sterling and 3.3% versus the euro.

Meanwhile, SA inflation ticked up to 5.1% y/y in September from 4.8% in August, mainly driven by the weaker rand and higher energy costs. Combined with the MTBPS’s forecasted surge in debt levels, most analysts now believe the window for further interest rate cuts has passed.

The FTSE/JSE All Share Index hit new record highs, closing at around 58,980 on 31 October and returning a strong 6.3% for the month. The Index has now returned 19.6% so far this year. This was mainly on the back of the weaker rand (which lifted the earnings and share prices of large rand-hedge shares) and stronger resources shares. Financials also managed to gain 2.5% in October thanks to a solid performance in the first two weeks of the month.

According to Morningstar data, the average ASISA SA general equity fund returned 5.2% for the month. The average multi-asset high equity (balanced) fund delivered 3.9%, while multi-asset low equity funds averaged 2.2%, and multi-asset income funds returned 0.5% on average.

Adapted article by Pieter Hugo – Prudential Asset Managers