The Olympic Games of Rotation –
In the grand arena of financial markets, akin to an Olympic stadium buzzing with excitement, we’ve seen a remarkable shift in front runners over the past month. In the U.S., it’s been a dazzling sprint by small-cap and value stocks, alongside cyclical sectors, outpacing the marathon dominance of mega-cap technology and growth sectors. This baton pass, after 18 months of large-cap growth leading the pack, appears driven by several key events.
Firstly, in the relay of economic indicators, the disinflation trend, highlighted by a cooler-than-expected US July CPI report showing 3.0% year-over-year inflation, has ignited this rotation. Secondly, with inflation cooling and a softening labour market, the markets now anticipate three Fed rate cuts by year-end, further supporting broader market moves. Additionally, the second-quarter earnings season has revealed a broadening of earnings growth, with sectors like financials, energy and healthcare vaulting ahead.
As a result, the tech-heavy Nasdaq 100 stumbled, declining by -1.6% for the month (YTD: +15.6%), while the broader S&P 500 Equal Weighted Index increased by 4.5% (YTD: +9.8%). Small caps also had a strong performance, with the MSCI World Small Cap Index jumping by +6.9% (YTD: +8.4%), compared to the MSCI World Large Cap Index, which was flat for the month (YTD: +14.7%).
Across the globe, Chinese markets faced hurdles, with the MSCI China USD Index declining by -1.4% (YTD: +3.6%) as unexpected rate cuts by the central bank failed to instil confidence in the economic outlook. This series of rate cuts signalled Beijing’s growing urgency to support growth after China’s GDP fell short of expectations in the second quarter. Other data also highlighted economic weakness, with retail sales, industrial production and property investment slowing in June.
Locally, in South Africa, the central bank kept its main interest rate unchanged at 8.25% for the seventh consecutive meeting. However, the decision was not unanimous for the first time since September 2023, reflecting a split in the ranks. The South African Reserve Bank’s Monetary Policy Committee, much like a divided rowing team, had four members preferring an unchanged stance and two favouring a 25-basis-point rate cut. Governor Lesetja Kganyago maintained his hawkish tone, noting that although two members preferred a rate cut, the risks to the inflation outlook were now on the upside, with key concerns remaining around administered prices, services inflation and persistent global inflation.
Despite this, local equity markets continued their winning streak with the FTSE JSE All Share Index ending the month up +3.9% (YTD: 9.9%), buoyed by strong performances from both the resources and financials indexes, which ended up +5.7% (YTD: +10.2%) and +5.2% (YTD:14.4%) respectively.
As the leading pack in the performance race now broadens to include others, much like the diverse disciplines celebrated in the Olympics, the key investment strategy moving forward will remain based on diversification. Embracing a wider range of opportunities will help achieve a more balanced and resilient market performance, ensuring that investors can navigate through the various events of the financial games with greater agility and success.
Article by Corian Capital