August posed significant challenges for both fund managers and their clients. Global financial markets initially endured a nearly 10% decline, followed by a partial recovery later in the month. This decline was precipitated by a confluence of factors, including the downgrading of the US credit rating by Fitch, resulting in elevated US real bond yields, as well as apprehensions regarding deflationary trends in China and rising energy prices. Consequently, key indices such as the MSCI ACWI (-2.79%), MSCI EM (-6.16%), and the S&P 500 (-1.65%) closed the month in negative territory, all assessed in US Dollar terms. Additionally, European natural gas prices surged by nearly 40%, driven by potential disruptions in liquefied natural gas supply, while oil prices reached their highest point in nine months, further amplifying concerns related to inflation.
In the United States, inflation rates persisted above the 2% mark, prompting the Federal Reserve to reiterate its steadfast commitment to its containment. The legal challenges faced by former President Donald Trump also introduced dynamics impacting the upcoming presidential election. Global economic indicators indicated a deceleration in economic activity, particularly within the service sector of major economies. While there were signs of a modest recovery in the manufacturing sector, there remained uncertainty about its ability to counterbalance the slowdown in services. Fitch’s decision to downgrade the US credit rating to AA+ prompted criticism but had limited repercussions on the bond market. Inflation continued to exert significant influence over US asset performance.
Despite these challenges, positive developments were observed in the demand for stocks associated with input-related industries, particularly in the field of artificial intelligence. Notably, Nvidia exceeded earnings expectations and sustained its growth trajectory. Nevertheless, geopolitical tensions in the technology sector emerged as the United States imposed restrictions on investments in specific Chinese technology sectors. This policy shift had substantial consequences for capital flows, resulting in a substantial decline in US dollar investments in venture capital and private equity funds targeting the Chinese market. China’s economic deceleration raised concerns, prompting the People’s Bank of China to reduce mortgage rates for the first time since the global financial crisis. Concurrently, the expansion of the BRICS summit’s membership heightened geopolitical risks, particularly in the Black Sea region.
The BRICS summit aimed to contest US dominance and advance a more multipolar global order; however, substantial advancements in this direction were elusive. The enlargement of BRICS membership carried the possibility of generating friction between member states and Western nations. The relative performance of emerging markets versus developed markets hinged on factors such as currency fluctuations, shifts in the manufacturing cycle, and changes in commodity prices. Emerging markets confronted challenges stemming from China’s economic slowdown and fluctuations in the global manufacturing cycle. Overall, the global economic and political landscape was marked by uncertainty, with a multitude of factors influencing global markets and economies.
Turning our focus to the domestic market, South Africa finds itself in a delicate balancing act as it navigates the complexities of its relationships with both Eastern and Western allies, all against the backdrop of political turmoil in the run-up to the 2024 ANC elections. A coalition of seven political parties has coalesced with a shared objective: unseating the ANC in 2024 and establishing a coalition government that does not align with either the ANC or the EFF. With opinion polls suggesting a decline in support for the ANC, political risks are on the rise. Structural reforms remain stagnant, prompting concern from the International Monetary Fund. Given the constrained state of public finances, the mobilization of private capital has become a compelling imperative.
It is noteworthy, however, that despite challenges such as power shortages and low consumer confidence, the South African economy has displayed resilience, evidenced by year-on-year growth. The economy may have averted contraction in the second quarter, as indicated by robust year-on-year growth of 1.1% in mining and manufacturing in June, exceeding expectations. Despite the adverse impact of load shedding on GDP growth, the adaptability of the private sector has been a prominent factor. While consumer confidence remains subdued, lower-than-anticipated inflation has diminished the likelihood of further interest rate hikes, although the performance of the rand continues to be a significant determinant.
Nevertheless, concerns persist within the equity market, with foreign investors demonstrating a notable lack of enthusiasm. This, coupled with the global concerns discussed earlier, led to a substantial decline in the JSE All Share Index (-10.56%), with Resources (-15.07%) and Industrials (-10.83%) sectors experiencing the most significant declines.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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