In September, global stock markets witnessed a decline due to cautious statements from central bankers that undermined investor confidence. This decline was further exacerbated by the ongoing surge in crude oil prices, with West Texas Intermediate (WTI) crude oil prices rising by 44.2% since their low in May. The sharp increase in oil prices raised concerns that central banks worldwide might maintain high-interest rates, at a time when global economic growth was already a source of worry. In the United States, headline inflation saw a significant increase in August, primarily driven by surging gasoline prices, pushing the annual inflation rate to 3.7%. The sharp rise in crude oil prices introduced uncertainty regarding future inflation, potentially influencing the Federal Reserve (Fed) to maintain a tighter monetary policy.
Consequently, heightened uncertainty led to a decline in global equities, with the MSCI All Country World Index ending September with a 4.14% decrease. Both the MSCI World (-4.31%) and MSCI Emerging Markets (-2.62%) indices ended the month in the red — in US Dollar terms.
While the Fed chose not to change interest rates in September, its economic projections, as indicated by the dot plot, signalled an expectation of one more rate hike by the end of the year. This shift from earlier projections also suggested a reduced likelihood of future rate cuts in 2024, causing Treasury yields to rise and putting pressure on equities sensitive to interest rate fluctuations.
China continued to face challenges in re-igniting domestic growth, primarily due to persistent issues in its property sector, which was once a significant contributor to its GDP. The ongoing economic difficulties in China had global repercussions, impacting both global growth prospects and overall market sentiment.
Our portfolios and funds benefited from the relative underweight in global risk assets, both in equities and global property (-6.56% for the month). Remaining cautiously positioned for the month, there are a few opportunities to upweight risk asset exposure, but these will be actioned selectively.
SOUTH AFRICAN OVERVIEW
In South Africa, equities mirrored the global trend, with the JSE All Share Index declining by 2.55% in September. Notably, the industrials and financial sectors experienced the most significant losses, both registering declines of 4.44% and 3.83% respectively. In contrast, the resources sector posted a marginal uptick of 0.9%, the only sector to end positively for the month. Additionally, South African listed property erased gains achieved since June, declining by 4.08% and ending the quarter (Q3) down by 0.33%. All this despite our economy surpassing expectations in the second quarter of 2023, registering a 0.6% quarter-on-quarter growth rate. This positive outcome was mainly attributed to the manufacturing and finance sectors, although a 0.6% growth rate remains relatively modest. Additionally, concerns arose as loadshedding accelerated, potentially negatively affecting consumer and business sentiment.
Regarding inflation, South Africa saw both annual headline and core inflation rates accelerate to 4.8%, falling within the target range. Consequently, the South African Reserve Bank (SARB) opted to maintain interest rates in September. However, the SARB highlighted the risk of deteriorating public finances contributing to inflationary pressures. Increased demands for public sector wages and reduced tax collections prompted the government to implement cost-cutting measures as it grappled with expenditure requirements. The SARB Governor emphasized that future rate cuts would be contingent on inflation declining to the target level of 4.5% and remaining there on a sustainable basis.
Overall, our cautious bias stood us in good stead (on a relative basis) during the month of September, and we continue that view heading into October. With interest rates looking to peak both locally and globally, opportunities in treasury bonds are piquing our interest with only a few opportunities in risk assets to work with. The recent dramatic decline in listed property values is also interesting and should provide some opportunity once we see bond yields coming down and interest rates following suit.
Quantitative Analyst & Portfolio Manager
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