In spite of strong economic data coming out of the US, equity markets sold off sharply during October over concerns of a widespread slowdown in global growth. The prospect of rising interest rates in the US and mounting trade-war tensions between the US, China and Europe weighed on investor sentiment, with the IMF downgrading its global growth forecast to 3.7%, down 0.2% from its previous outlook.
Emerging markets came under pressure from a stronger US dollar and rising yields in the US, which are making developing countries with high dollar-denominated debts less attractive. The current risk-off environment saw most emerging equity markets ending the month in negative territory. South Africa was no exception, with a combination of poor economic data, low growth forecasts and widening deficits placing additional pressure on the local bourse.
In the US, the economy continued to show signs of firm growth supported by strong consumer spending. Unemployment fell to its lowest level in almost 50 years – while headline CPI fell to 2.3%. The stock market, meanwhile, ended October deeply in the red over concerns of a slowdown in global growth, declining corporate profits and rising interest rates, with the tech-heavy Nasdaq particularly hard hit. Corporate profit forecasts came under pressure, even though actual corporate earnings reports were broadly positive, as worries that increased tariffs (due to the US-China trade war) would push up manufacturing costs weighed on the market. Investor sentiment was further dampened by fears that the Fed may continue increasing interest rates to ‘restrictive’ levels (higher than those previously expected) to keep inflation in check, which if implemented would likely result in an economic slowdown.
European stocks closed the month in negative territory as nerves around Brexit negotiations continued to weigh on investor sentiment. The EU and the UK are yet to reach a breakthrough, with the Brexit deadline fast approaching. The UK government, however, alluded to the possibility of leaving the EU without a deal – an action that could negatively impact UK and European company earnings. Adding to European risk aversion was the Italian government’s ongoing budget dispute with the European Commission, after the Commission rejected Italy’s plans to increase its 2019 deficit. Italy’s fiscal situation remains a concern for investors, with Moody’s downgrading the country’s sovereign debt by one notch.
Asian markets didn’t fare much better as the prospect of rising US interest rates, tensions between the US and Saudi Arabia and the global trade war weighed on the Nikkei and Hang Seng. China’s economy, however, continued to show its resilience with Q3 GDP increasing by 6.5%.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned -7.5% in October. Developed markets outperformed emerging markets, with the MSCI World Index delivering -7.3% and the MSCI Emerging Markets Index returning -8.7%.
In South Africa, former central bank governor Tito Mboweni was appointed as the country’s new finance minister following Nhlanhla Nene’s resignation. Markets reacted positively to the news; however, the rally was short-lived. Mboweni’s first medium-term budget policy statement (MTPBS) as finance minister painted a sobering picture of the state of the economy, forecasting low growth and wider deficits. Ratings agency Moodys cited the country’s low-growth state as a credit negative, while S&P highlighted its concerns over the country’s postponement of fiscal consolidation and lack of clarity around land reform. South Africa’s unemployment rate, meanwhile, increased to 27.5% in Q3, marginally higher from the 27.2% posted in the second quarter. In more positive news, business confidence increased to 93.3 in September (up from 90.5 for the previous month). The FTSE/JSE All Share Index returned -5.8% in October, in line with global markets.
CPI moved higher in September to 4.9% but well within the SARB’s target band of 3% – 6%. The rand depreciated 4.7% against the US dollar, 2.0% against the euro and 2.5% against the pound sterling.
According to Morningstar data, the average multi-asset high equity (balanced) fund delivered -3.0%, while multi-asset low equity funds averaged -1.3% and multi-asset income funds returned 0.5% on average.
Adapted article by Pieter Hugo – Prudential Investment Managers