Global equity markets were broadly stronger in June, buoyed by the prospect of a positive outcome from the trade negotiations between the US and China at the G20 Summit, and the possibility of interest rate cuts coming out of the US and Europe. Global risk sentiment was muted for the month, boosting appetite for emerging market assets. In spite of South Africa’s GDP contracting by its highest rate in a decade, local equities closed the month in positive territory, lifted by higher gold prices and a significantly stronger Resources sector.
Markets reacted positively to the news that the US Federal Reserve could cut borrowing costs sooner than expected. Following its June FOMC meeting, the Fed used noticeably more dovish language regarding its outlook on US economic growth, after which the market priced in a 0.25% rate cut in July. The Fed also released a statement reasserting its independence from political pressure, following increased criticism from President Trump. A major driver of equity returns came from the prospect of a positive outcome from trade talks between the US and China at the G20 summit in Japan. This was supported by President Trump’s decision to temporarily lift the ban on Chinese telecom giant, Huawei, and to hold off on any further tariff increases on Chinese exports. Meanwhile, the US suspended its threat to impose tariffs on Mexico after the two countries reached a consensus over Mexican immigration into the US, however announced new sanctions against Iran in response to the Iranians shooting down a US military drone.
UK AND EUROPE
European equities were upbeat following comments from ECB President, Mario Draghi, pointing to possible rate cuts in the absence of inflationary improvements. Eurozone inflation has been well below the ECB’s target of 2%, coming in at 1.2% (y/y) for June 2019.
In the UK, GDP for Q1 2019 expanded by 1.8% y/y, however, the BoE cut its growth forecast to 0% for Q2 q/q, while leaving interest rates on hold. Business sentiment deteriorated further as uncertainty rose on the back of an increasing likelihood of a “no deal” Brexit as Boris Johnson emerged as the leading candidate to succeed Theresa May as PM. This also put the pound under more pressure. However, market sentiment was largely optimistic that the BoE could cut rates sooner than expected as a means to stimulate economic growth. At the same time, UK homebuilders stocks rose on reports that Johnson would cut taxes on house sales to boost the economy.
Meanwhile, Italy’s government and the EU Commission agreed on measures to reduce Italy’s public debt, thereby avoiding sanctions that could have led to a fine amounting to around €3.4 billion (0.2% of Italy’s GDP).
GDP growth for the EU increased by 0.5% q/q annualised in the first quarter of 2019, up from the 0.3% q/q annualised posted in Q4 2018. Major drivers came from Germany, Spain and a recovery from recession by Italy.
CHINA AND JAPAN
In China, weaker trade data provided further evidence that US-China trade tensions had had an impact on regional trade flows. Hong Kong’s export growth slowed from 2.6% y/y in April to 2.4% y/y in May, with officials highlighting the US-China trade tensions as the main factor behind the weakness.
In Japan, the BoJ left its monetary policy unchanged at the conclusion of its June meeting, with the official assessment that the economy was “expanding moderately” and expected to continue. Revised GDP showed slightly stronger growth for the first quarter of 2019, increasing 2.1%% (q/q annualised).
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 6.6% in June. Developed markets outperformed emerging markets. Among developed markets, the S&P 500 produced 7.0%, the Dow Jones Industrial 30 returned 7.3%, while the technology-heavy Nasdaq 100 posted 7.7%. The UK’s FTSE 100 returned 5.0% and Japan’s Nikkei 225 delivered 4.3%.
In South Africa, President Ramaphosa’s first State of the Nation Address was met with mixed reviews, specifically around the lack of clarity around the government’s plans to address economic growth and indebted SOEs (particularly Eskom). GDP growth contracted by 3.2% y/y in the first quarter of 2019, the sharpest decline since Q1 2009. Meanwhile, ratings agency Moody’s lowered its economic growth forecast for 2019 to 1.0% from 1.3%, stating that the first quarter’s contraction had dented the government’s revenue and policy options. In more positive news, South Africa’s manufacturing grew by 4.6% y/y in April, significantly more than expected and the largest increase since June 2016.
The FTSE/JSE All Share Index closed the month 4.8% higher, as investors looked towards emerging markets in the wake of more dovish sentiment coming from the US and Eurozone central banks.
The rand appreciated against all major currencies, gaining 3.1% against the US dollar, 1.0% against the euro and 2.2% against the pound sterling.
According to Morningstar data, the average balanced fund delivering 1.8%, the average low-equity balanced fund produced 1.2%, while multi-asset income funds returned 1.0% on average.
Article by Prudential Investment Managers