February finally brought an end to the record 15-month winning streak in global equities, as markets experienced sharp losses starting in the first week of the month before retracing some of the decline.
The S&P 500 saw a correction of over 10% after the US January employment report highlighted strong wage gains, sparking investor fears of accelerating US inflation and interest rates, and exacerbated by losses in volatility-linked products. The resurgence in volatility after months of relative calm was a notable feature for the month, underpinned late in February by comments from new Federal Reserve Chairman Jerome Powell interpreted as hawkish, signalling that an additional fourth interest rate hike was likely this year. Powell cited labour market strength, inflation data moving higher towards the Fed’s 2.0% target, global economic growth and a more expansionary US fiscal policy as reasons behind his bullish outlook for the US economy.
Investors now see a 50% chance of a 25 basis point (bp) rate hike in the fourth quarter of 2018 (previously none), in addition to 25bps in March (with a 100% chance), and 25bps each in the second and third quarters (with 70% and 80% chances, respectively).
Global bond markets also reflected a likely acceleration in interest rate hikes. However, global fundamentals remained solid as shown in corporate earnings growth figures and generally expansionary economic indicators.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned -4.2% in February. Emerging markets underperformed with a -4.6% return from the MSCI Emerging Markets Index, while the MSCI World Index (for developed markets) returned -4.1%.
In South Africa, local bonds were supported by the well-received 2018/19 Budget, which showed an improving government fiscal position. President Cyril Ramaphosa’s new Cabinet appointments and the Budget were greeted with approval by investors and the credit rating agencies, further boosting confidence and optimism that the country would escape a downgrade by Moody’s in March.
Other positive factors included falling inflation (with CPI down to 4.4% in January from 4.7% in December) and market consensus for at least one interest rate cut by June. Amid this optimism, the rand gained ground against all three major currencies in February, despite retracing some gains at month-end due to renewed concerns over new land expropriation policy, appreciating 0.8% against a stronger US dollar, 3.3% against the UK pound sterling and 2.8% versus the euro.
SA equities, however, could not escape the global downturn: the FTSE/JSE All Share Index posted a -2.0% monthly return, weighed down by a steep decline in listed property shares (-9.9%) amid jitters over ongoing rumours centred around fraudulent accounting and share price manipulation in the Resilient group of companies.
The average multi-asset high equity (balanced) fund delivered -1.5%, while multi-asset low equity funds averaged -0.6%, and multi-asset income funds returned 0.7% on average.
Adapted article by Pieter Hugo – Prudential Investment Managers