Global Market and Economic Update
Global equity markets delivered mixed performance in July, as investors grappled with rapidly changing forward looking interest rate expectations from key economies, a slowing global economy (particularly in the US) and a reacceleration of inflation in some advanced economies (including the eurozone). Political developments were also front of mind during the month, with the sudden withdrawal of US President Joe Biden from the upcoming US presidential race creating an additional layer of uncertainty heading into the second half of the year. This followed an assassination attempt on Republican candidate, Donald Trump, at a rally in Pennsylvania, which heightened tensions and raised serious questions about the security detail on duty at the rally. There was positive news on the US inflation front, as a further moderation in US inflation in June and comments from the US Federal Reserve’s Chair Jerome Powell at a press conference on the 31st of July led to markets pricing in an increased likelihood of an interest rate cut from the Fed in September.
There were some moves from the key major global central banks during the month on interest rates. China’s central bank, the People’s Bank of China (PBOC), cut both short-term and long-term interest rates following a meeting of the Communist Party’s Central Committee. This was the first interest rate cut from the PBOC since August 2023 and signalled increasing intent from the government to support growth in the world’s second largest economy. In Japan, the Bank of Japan (BOJ) raised its benchmark interest rate from a range of 0%-0.1% to 0.25%, also announcing plans to reduce bond purchases going forward. This is the latest step from Japanese authorities to normalise interest rates and provided support to the Japanese Yen, which has recently come under severe pressure relative to key developed market currencies. While the US Federal Reserve left the Fed Funds Rate unchanged at 5.25%-5.50% during its July meeting, the Fed did open the door to the possibility of an interest rate cut in September. This followed positive news on the inflation front as well as some softening in the US labour market.
There was generally positive news on the inflation front for key developed market economies. In the US, inflation came in slightly lower than expectations, with headline CPI advancing 3.0% (year-on-year to the end of June 2024) versus May’s 3.3% print. US core CPI also moderated slightly to 3.3% (year-on-year to the end of June 2024), from May’s 3.4% reading. In the euro area, annual headline CPI inflation was 2.5% (year-on-year to the end of June 2024), slightly below May’s 2.6% level. With inflation still above the European Central Bank’s (ECB) 2.0% target, the likelihood of significant policy easing from the ECB has decreased slightly. In the UK, June headline CPI came in at 2.0% (year-on-year to the end of June 2024) and core CPI came in at 3.5%. Both figures were unchanged from May, which paves the way for the Bank of England (BOE) to lower interest rates for the first time in four years.
South African Market Update
South African asset classes continued a recent trend of strong performance during the month, outperforming both developed and emerging market peers. Investors continue to react positively to the market friendly election outcome, an improved growth outlook and a continuation of the stability in the electricity grid. The FTSE/JSE All Share Index delivered strong performance during the month, ending July at an all-time high. The performance was largely broad based, with all local equity sectors ending the month in positive territory.
SA bonds also delivered strong performance in July, as yields moved lower across the curve, as positive political developments and the increased possibility of lower interest rates in the second half of the year led to decent performance. SA property counters also ended the month with strong performance, as property cemented its lead as the best performing local asset class on year-to-date basis. The rand had mixed performance during the month against major developed market currencies, ending slightly stronger against the US dollar, but slightly weaker against both the pound sterling and the euro.
South African Economic Update
South Africa’s annual inflation rate moved lower to 5.1% (year-on-year to the end of June 2024) from 5.2% in May, while core inflation also moved lower to 4.5% from 4.6% in May. The disinflation trend was broad based in June, with nine of the 12 major categories recording smaller increases in the month. Headline CPI has now remained within a range of between 5%-6% for 10 consecutive months.
The South African Reserve Bank (SARB) met during the month and left the repo rate unchanged at 8.25% (with the prime interest rate remaining at 11.75%), in line with market expectations. Interestingly, however, two of the six Monetary Policy Committee (MPC) members voted for an interest rate cut of 0.25%, indicating an increased likelihood of interest rate decreases towards the end of the year.
In terms of economic data releases on GDP growth, data releases for May appear to indicate a continued trend of sluggish growth. Manufacturing production slowed to record a year-on-year contraction of -0.6%, while mining production and wholesale trade also struggled. While the economy is still expected to record positive growth in the second quarter off a low base in Q1, growth remains well below potential. The combination of an improvement in the rail and electricity sectors, the possibility of lower interest rates and better delivery on structural reforms by the newly formed government will hopefully result in an improved outlook for SA growth going forward.
Chart of the month: Shifting market leadership?
US small caps have come out of the doldrums to race 10% higher in just the 12 trading days to the 25th of July. At the same time, the large cap juggernaut known as the S&P 500 was down -3%. That 13% spread is the biggest 12-day outperformance by US small caps over large caps in the past 24 years.
Source: Charlie Bilello and Creative Planning. Data as of 25 July 2024.
See below for a summary of the key market movements for the month of July:
- The JSE All Share Index (+3.9%) ended July higher, as the index delivered strong performance during the month, ending at an all-time high.
- The performance from South African equities was broad based, with all local equity sectors ending the month in positive territory. Resources (+5.5%), Financials (+5.4%) and Industrials (+2.0%) all delivered strong returns during the month.
- Listed property (+4.4%) also ended the month higher, as the positive sentiment towards SA asset classes filtered through to property counters. Local listed property continues to be the best performing local asset class on a year-to-date basis, posting double digit gains over this period.
- Local bonds (+4.0%) ended the month higher, supported by lower yields (and higher prices) across the curve. The SA bond market continued to react positively to a market friendly election outcome as well as the increased possibility of lower interest rates in the second half of 2024.
- Cash continues to deliver positive outcomes for investors, given the level of interest rates available on conservative allocations. The asset class delivered a stable return of +0.7% during July.
- The major developed equity markets ended the month with mixed returns; however, most developed equity markets ended the month higher. The MSCI World Index delivered a return of +1.8%, which was slightly ahead of emerging market peers.
- Within emerging markets, there was a bit of a divergence in the fortunes of the key constituents during the month. India delivered decent performance, while China and Taiwan struggled slightly. The MSCI Emerging Markets Index ended the month +0.4% higher in July.
- Performance from the major developed equity markets varied, however, most markets delivered decent performance for the month. Germany’s FSE DAX (+2.5%), the UK’s FTSE 100 (+4.2%)and Japan’s Nikkei 225 (+5.6%) all delivered strong performance. China’s Shanghai SE Composite (-0.4%) ended the month marginally lower.
- Within US equities, the tech-heavy NASDAQ 100 (-1.6%) ended the month lower, weighed down by a combination of disappointing second quarter earnings releases as well as concerns over high valuations. The S&P 500 (+1.2%) ended the month higher, as we saw a slight reversal in the fortunes of unfavoured sectors including Real Estate and Utilities, while Information Technology and Communication Services were the laggards.
- In terms of the major commodities, Gold (+4.1%) ended the month higher, while both Copper (-4.9%) and Platinum (-3.9%) ended the month in negative territory. Oil (-8.6%) ended the month lower, despite rising significantly towards the end of the month. This followed increased tensions in the Middle East, as the killing of a Hamas leader in Iran and Israel launching airstrikes in Beirut led to concerns around supply disruptions.
- The rand delivered mixed performance against the major crosses this month. The currency gained ground against the US dollar (+0.4%), but lost ground against both the pound sterling (-1.2%) and the euro (-0.6%) during the month.
*All data is sourced from Morningstar Direct as at 31/07/2024. The performance of South African asset classes is quoted in rands and the performance of global asset classes is quoted in US dollars.
