Market Overview – November 2018

Market Overview – November 2018

Global equity markets reversed some of their losses in the last week of November following renewed optimism towards risk assets. News that the US would hold off imposing further tariff increases on Chinese imports for 90 days was arguably the primary driver behind investor sentiment, coupled with the prospect of the US Federal Reserve possibly paring back further interest rate hikes. Demand for risk assets helped lift emerging market returns, however South African equities missed out on the risk-on sentiment as a string of poor economic data, a stronger local currency and rising interest rates weighed on the local bourse.

In the US, markets rallied following comments from the Federal Reserve signalling a potential slowdown in the Fed’s three-year interest-rate hiking cycle. The comments came on the back of economic data which pointed to a possible deceleration in economic growth and inflation, driving demand for longer-dated US debt. In other news, the US concluded the signing of the much-anticipated North American Trade Agreement, while the biggest driver of equity returns for the month came from the announcement of a 90-day pause in the trade war between the US and China – giving the two countries more time to negotiate before a further round of tariffs is imposed. The S&P 500 and the Nasdaq rallied on the back of the announcement, posting their strongest weekly returns since December 2011.

In the UK, Brexit concerns continued to weigh on the market, with Prime Minister Theresa May’s exit strategy in danger of being rejected by Parliament and spreading further uncertainty. Worries that a disorderly break from the EU could trigger a recession were renewed following a report from the Bank of England, which suggested that Britain’s economy would shrink by 10% if it left the EU without a deal. Also weighing on investor sentiment was a broad-based decline in corporate earnings, sparking concerns over the region’s growth outlook. In more positive news, the Italian government and the EU moved closer to reaching a consensus over Italy’s budget deficit – an issue that has weighed on European markets in recent months.

In Asia, news of the US-China ceasefire helped drive equity returns, offsetting reports of a potential contraction in China’s manufacturing output.

Turning to South Africa, in spite of inflation coming in at 5.1%  for October as expected, the SARB went against market expectations by increasing its benchmark lending rate by 0.25 percentage points to 6.75%, citing long-term inflationary pressure as the main catalyst behind the decision. This lent some support to the rand and bonds, demonstrating the SARB’s intent to rein in inflationary expectations around the 4.5% midpoint of its target band.

Global ratings agency S&P announced that it would keep South Africa’s foreign-currency and local-currency credit ratings at below investment grade due to concerns over the country’s fiscal prospects and debt burden; however, its stable outlook made the prospects of a further near-term downgrade unlikely. Eskom, meanwhile, announced nation-wide electricity outages due to a sharp decline in coal stockpiles at five of its power stations. Unsurprisingly, business confidence fell for the third straight quarter, currently sitting at 31 points for Q4 – three points shy of last quarter’s reading.

In more positive news, manufacturing output rose by 0.1%  while retail sales rose 0.7%, both for September. The rand also benefited from the global risk-on environment, gaining 6.9% against the US dollar, 6.8% against the euro and 7.1% against the pound sterling.

The FTSE/JSE All Share Index returned -3.2% in November.

The average balanced fund delivered -2.1% and the average low-equity balanced fund averaged -1.0%, while multi-asset income funds returned 0.6% on average.

Adapted article by Rushil Jaga – Prudential Investment Managers

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