Market Overview – January 2018

January marked a record 15 months of gains in global equity markets, with sentiment underpinned by solid corporate earnings growth (including higher earnings prospects) and economic data confirming the entrenched and coordinated nature of global growth. Fresh record highs were posted across numerous equity markets, while global bonds were mixed.

In the US, more analysts pointed to warning signs of the economy overheating, as unemployment reached a near-17-year low at 4.1%. The US Federal Reserve left interest rates unchanged as expected at its 31 January FOMC meeting, the last for Chairman Janet Yellen. However, the Fed adopted a somewhat more cautionary tone on expected inflation, causing some analysts to adjust their interest rate forecasts for 2018 higher – to four 25bp hikes from three previously. Market consensus is pointing to a 25bp hike at the next FOMC meeting in March.

Among developed markets, the S&P 500 returned 5.7% and the Dow Jones Industrial 5.9%, while the Nasdaq delivered 8.7%. In Europe, the Dow Jones EuroStoxx 50 posted a 6.9% return, with France’s CAC producing 6.6% and Germany’s DAX 5.4%. The UK’s FTSE 100 was more subdued at 2.8% in January. Japan’s Nikkei returned 4.5%.

In South Africa, improving political and business sentiment, as well as global equity gains, lent support to the local equity market in January, but returns were hit by weakness in Naspers shares, and a negative research report on Capitec released by US group Viceroy, which caused its share price to plummet. The report raised concerns in an already-jittery market (following the Steinhoff debacle) over poor lending practices at the bank, which were subsequently rebutted by company management, the SA Reserve Bank and S&P Global Ratings.

Listed property shares were also punished by rumours and worries over balance sheet weakness at the Resilient stable of property companies. In other news, consumer inflation was reported at 4.7% in December, for an average CPI of 5.3% for 2017, within the SA Reserve Bank (SARB)’s 3%-6% target band.
The SARB left interest rates unchanged at its 18 January MPC meeting, as expected, despite sluggish growth. It cited two main risks to its inflation outlook: the looming possibility of a sovereign credit rating downgrade by Moody’s, which could send the rand weaker (fuelling inflation), and upside risks to the international oil price.

The rand, meanwhile, appreciated 3.7% against a weaker US dollar in January, briefly moving near the R11.80 level versus the greenback on the last day of the month, its lowest level in nearly three years.

And although the FTSE/JSE All Share Index hit new record highs during January, it retraced almost all of its gains and returned only 0.1% for the month. The Listed Property sector returned -9.9% for the month, while Financials delivered -3.0%. Resources were the best performing stocks with a total return of 3.6%, while Industrials delivered only 0.4%, with large rand-hedge stocks impacted by the stronger rand.

The average multi-asset high equity (balanced) fund delivered 0.7%, while multi-asset low equity funds averaged -0.1%, and multi-asset income funds returned 0.4% on average.

Article by Pieter Hugo – Prudential Investment Managers