| Global Market and Economic Update Global markets faced weak returns in October, following a strong start to the month in which U.S. stocks reached all-time highs. This upward momentum was short-lived, as global equities experienced a sell-off triggered by better-than-expected U.S. economic data, which led to reduced expectations for further cuts in the federal funds rate. U.S. 10-year Treasury yields remained near recent peaks, reflecting steady economic growth amid recent interest rate cuts. Speculation of a potential Donald Trump victory in the November 5th election added support for U.S. yields, as his policies on tariffs, taxes and immigration are viewed as inflationary. In the euro area, recent weak Purchasing Managers’ Index (PMI) data indicated contracting business activity. Slower growth, weaker employment and inflation falling short of projections led the European Central Bank (ECB) to cut policy rates by an additional 0.25%, bringing the benchmark interest rate down to 3.25%. This decision weighed on European equities throughout October, ending the month negative. Turning to Japan, the yen weakened following the snap election, raising concerns about currency risk. As a result, the yen reversed all gains made since the Bank of Japan’s interest rate hike in late July, diminishing investor sentiment and applying downward pressure on Japanese equities. While China’s stock market experienced losses in October, reversing some of the gains from recent stimulus measures, the Chinese index remains significantly higher over the past three months. The U.S. equity market is on track to record one of its strongest years in history. The S&P 500 has already achieved 47 all-time highs, averaging over one new high each week. Two primary drivers are fueling this upward momentum: strong corporate earnings and expanding valuation multiples. The S&P 500’s trailing twelve-month operating earnings per share (EPS) is expected to reach a new high in Q3, marking an 8% increase year-on-year. Additionally, enthusiasm around the AI revolution has spurred significant multiple expansion, pushing the S&P 500’s price-to-peak earnings ratio up by 20% year-to-date –from 24.8 to 29.8 – about 50% above the historical median. After a strong initial performance, the market reacted negatively to better than expected U.S. economic data which led investors to temper their expectations of further Fed fund interest rate cuts. In October, only three of the S&P 500’s eleven sectors posted gains, with financials and telecommunications leading contributing positively. The energy sector also delivered marginally positive gains as geopolitical tensions in the Middle East eased; Israeli airstrikes on Iran avoided critical oil and nuclear sites, alleviating fears and providing relief across the global energy sector. Conversely, healthcare, consumer staples, and real estate were the main detractors, weighing on overall market performance. The annual inflation rate in the United States continued its downward trend in September, slowing for the sixth consecutive month to 2.4%, the lowest level since February 2021. This figure represents a slight decrease from 2.5% in August, although it came in marginally above analysts’ expectations of 2.3%. In contrast, the core inflation rate unexpectedly rose to 3.3%, up from 3.2% in the preceding two months, defying market predictions that it would remain steady at 3.2%. In the Euro Area, the annual inflation rate for September 2024 was revised down to 1.7%, a decline from an initial estimate of 1.8% and down from 2.2% in August. This marks the lowest inflation rate since April 2021 and falls below the European Central Bank’s target of 2%. However, preliminary estimates suggest that inflation rebounded to 2% in October, surpassing forecasts of 1.9%. This increase was largely anticipated due to base effects, as the significant declines in energy prices from the previous year no longer influence annual comparisons. Meanwhile, China’s annual inflation rate remained subdued at 0.4% in September 2024, below market expectations and down from 0.6% in August. This figure is the lowest recorded since June and highlights the need for Beijing to implement further policy measures to address the growing deflationary pressures in the economy. In the third quarter of 2024, the U.S. economy grew at an annualised rate of 2.8%, falling short of the 3% growth recorded in the second quarter and below economists’ forecasts of 3%. However, personal spending showed significant improvement, increasing at the fastest pace since the first quarter of 2023, with a growth rate of 3.7% compared to 2.8% in Q2. This surge was driven by a notable 6% rise in the consumption of goods, up from 3% in the previous quarter, along with robust spending on services, which increased by 2.6% versus 2.7% in Q2. Key contributors to this growth included prescription drugs, motor vehicles and parts, outpatient services, as well as food services and accommodations. In the Eurozone, preliminary estimates indicated that GDP expanded by 0.4% in the third quarter of 2024, marking the strongest growth rate in two years. Within the Eurozone, the German economy expanded by 0.2%, unexpectedly avoiding a recession after a downwardly revised decline of 0.3% in the second quarter. Growth also accelerated in France, with GDP rising by 0.4% compared to 0.2% in Q2, while Spain’s economy remained robust, posting a growth rate of 0.8%, consistent with the previous quarter. Looking ahead, the European Central Bank (ECB) projects that Eurozone GDP will expand by 0.8% for the year. In October, the Japanese yen weakened, drifting above 150 to the USD and nearing three-month lows. This decline is attributed to heightened uncertainty surrounding domestic policies following the ruling coalition’s loss of its parliamentary majority in the recent elections. The political turmoil poses a significant challenge to the Bank of Japan’s plans for monetary normalisation after decades of sustained stimulus. Additionally, the yen faces external pressure from a strong U.S. dollar, bolstered by expectations of a more cautious approach to interest rate cuts from the Federal Reserve and speculation regarding a potential victory for Donald Trump in the upcoming November elections. Meanwhile, the Chinese economy demonstrated resilience, recording a seasonally adjusted growth of 0.9% in the third quarter of 2024, up from a 0.7% increase in the second quarter. This marks the ninth consecutive quarter of growth, driven by recent government initiatives designed to stimulate consumption, mitigate deflationary risks, and reverse the downturn in the real estate sector. On the monetary side, the People’s Bank of China implemented the largest stimulus package since the pandemic in September, which included significant reductions in interest and mortgage rates to support economic recovery. South African Market Update Following global markets, SA stocks were under pressure in October, with the local markets ending the month in the negative. Despite this, SA equities outperformed their emerging market peers, largely due to a strong performance from resources, with gold stocks leading the way over the month (Anglogold Ashanti PLC, +7.1%; Gold Fields Ltd, +7.9%). However, industrials and property delivered relatively weak performance over the month of October, detracting from performance. SA’s Mid-Cap Index (+0.5%) and Small-Cap Index (+0.1%) offered some positive contributions, ending the month marginally positive. South Africa’s 10-year government bond yield was near 9.50%, its highest since late July, as investors remained focused on the South African Reserve Bank (SARB)’s future moves. Additionally, expectations that the U.S. Federal Reserve will adopt a more moderate approach to rate cuts this year remained intact, influencing sentiment in the South African bond market. South African Economic Update South Africa’s annual inflation slowed for a fourth consecutive month to 3.8% in September and is now at the lower end of the Reserve Bank’s 3% to 6% target range, strengthening the case for further interest rate cuts by SARB. Meanwhile, investors maintain a positive outlook for the country’s economy. Moreover, South Africa’s fiscal policies are anticipated to remain on track, thanks to recent economic and political changes resulting from the recent elections. The South African rand traded around R17.6 to the USD, up slightly from an over one-month low of USD/ZAR 17.8 hit on October 23rd, helped by a slightly softer dollar. Still, investors remained focused on the Federal Reserve’s policy trajectory, with growing expectations that upcoming rate cuts may be less aggressive than initially anticipated. South Africa’s annual inflation rate dropped below 4% for the first time in over three years, reaching 3.8% in September, strengthening the case for policymakers to proceed with further rate cuts. In its recently published biannual monetary policy review, the central bank stated that its policy stance remains moderately restrictive and the disinflation process is progressing as expected. The National Treasury’s 2024 Medium-Term Budget Policy Statement (MTBPS) presented a mix of fiscal challenges and policy initiatives. Economic growth forecasts have been scaled down to 1.1% for 2024 and 1.7% for the period 2025-2027, reflecting the subdued economic performance seen in the first half of 2024. While investment and household spending forecasts remain conservative, the Treasury is pinning hopes on infrastructure-driven growth alongside potential boosts from decreasing inflation, anticipated monetary easing and rising commodity prices. Revenue forecasts were revised downward, with gross collections expected to reach R1.84 trillion for FY24/25, a reduction of R22.3 billion due to lower-than-expected fuel tax, personal income tax and VAT collections. However, there may be room for upside, as additional revenue could materialise from reforms in the energy sector, the implementation of the two-pot retirement system and a potential lift in business confidence. Chart of the month: PCE Inflation Approaches the Fed’s 2% Target Whether assessed by excluding food and fuel or by utilising the trimmed mean approach calculated by the Dallas Federal Reserve – which removes outliers and averages the remaining values – Personal Consumption Expenditures (PCE) inflation is very close to the Federal Reserve’s 2% target and is exhibiting a clear and steady declining trend. This development is favourable for the Fed, suggesting that inflationary pressures are easing. PCE Inflation Approaches the Fed’s 2_ Target.jpg See below for a summary of the key market movements for the month of October: The JSE All Share Index (-0.9%) decreased in October, mirroring the weak performance across global markets. Despite this, the index remains near its all-time-highs and has outperformed its emerging market peers over the monthResources (+3.0%) contributed positively to performance, with gold stocks delivering strong returns for the month. Financials (-0.4%) ended marginally negative. Industrials (-2.8%) and Listed Property (-2.8%) ended the month negatively, detracting from overall performance.After four months of declining bond yields and a reduced election risk premium embedded in yields, Local bonds (-2.2%) weakened during October as yields rose – in line with rising global yields.Cash (+0.7%) remained a stable investment option, highlighting the attractive yields available on conservative allocations. Major developed equity markets recorded negative returns, as the market reacted negatively towards better-than-expected U.S. economic data which led to reduced expectations for further cuts in the fed funds rate. The MSCI Word Index (-2.0%) recorded negative gains for the month. The MSCI Emerging Markets Index (-4.4%) lagged behind its developed market peers.Within emerging markets, China’s Shanghai SE Composite (-4.6%) and Korea’s KOSPI (-6.6%) ended the month lower, reflecting the widespread weakness in broader emerging markets. Performance in major developed markets followed a similar trend, as the UK’s FTSE 100 (-5.5%), Japan’s Nikkei 225 (-3.2%) and Germany’s DAX (-4.0%) all posted negative returns. In the U.S., tech-heavy NASDAQ 100 (-0.8%) ended slightly negative, marginally outperforming the broader market. Furthermore, the S&P 500 (-0.9%) struggled over the month, as Healthcare, Consumer Staples and Real Estate detracted from performance.Commodities had a mixed month, with Gold (+4.0%) and Platinum (+1.0%) finishing October in positive territory. In contrast, Copper (-4.7%) had negative returns for the month. |
*All data is sourced from Morningstar Direct as at 31/10/2024. The performance of South African asset classes is quoted in rands and the performance of global asset classes is quoted in US dollars
