The month of August 2024 was particularly eventful, marked by heightened volatility in global financial markets. In the US the S&P 500 experienced a 6.1% drop in the first three trading days of the month, driven by weaker-than-expected economic data. Non-farm payrolls came in at 114,000 jobs added, significantly below the anticipated 176,000. This disappointment led to a sharp sell-off, causing the unemployment rate to rise to 4.3% from 4.1% in June. This triggered the Sahm Rule, a key recession signal, and stoked fears of an impending economic downturn.
However, the S&P 500 staged a recovery, finishing the month with a 2.3% gain, and building on its impressive 18.4% year-to-date rise. July’s Consumer Price Index (CPI) print of 2.9% helped soothe inflation concerns, as the figure came in below the expected 3.0%. Shelter inflation, however, remained high, contributing to the bulk of the headline inflation figure. This gave the markets some confidence that inflation was heading toward the Federal Reserve’s 2% target, while not drastically affecting economic growth.
The broader global equity markets mirrored this pattern of volatility. For example, Japan’s Nikkei 225 dropped by 1.16%, largely due to the Bank of Japan’s unexpected rate hike of 25 basis points, which contributed to a sell-off in risk assets. In contrast, European equities, such as the German DAX and French CAC 40, advanced by 2.15% and 1.32%, respectively, buoyed by improving sentiment and reduced inflation concerns. Central Banks globally, including the Federal Reserve and Bank of England, signaled that they may soon begin easing their interest rate policies, providing further support to equity markets.
Global bond markets benefited from a “flight to safety” early in the month, as investors sought refuge during the equity market sell-off. The Bloomberg Global Aggregate Bond Index rose by 2.4% as falling yields in response to rate cut expectations bolstered bond prices. The U.S. 2-year Treasury yield also dropped significantly as investors recalibrated expectations for Federal Reserve rate cuts. Commodities, however, faced a more mixed outcome. Oil prices fell by 2.38% amid fears of weaker global demand, particularly in China, where the economy continued to grapple with a real estate crisis. Gold, on the other hand, gained 2.28%, benefiting from its status as a safe-haven asset during times of market turbulence.
Locally, the JSE All-Share Index continued its upward momentum, posting a 1.19% gain for the month, reaching record highs before pulling back slightly. Domestically focused sectors, particularly property, financials, and retail, performed well. The SA Listed Property Index surged by 8.3%, reflecting renewed investor confidence driven by lower bond yields and expectations of future rate cuts. Property companies like Hyprop Investments, which gained 18.40% for the month, were standout performers, aided by a wave of deal-making and improving market sentiment.
Industrial stocks, such as those in the Indi-25 Index, rose by 4.0%, while financials in the Fini-15 Index increased by 5.5%, driven by banks and insurers benefiting from improved economic outlooks. Despite the strong performance of these sectors, South Africa’s broader economy remained under pressure, with high unemployment and slow growth continuing to be concerns.
South Africa saw some relief on the inflation front, as July CPI dropped to 4.6% year-over-year, the lowest in three years, down from 5.1% in June. This was largely driven by reductions in food and fuel prices, which eased the inflationary burden on consumers. This drop in inflation is bringing the rate closer to the South African Reserve Bank’s (SARB) target of 4.5%, increasing the likelihood of an interest rate cut at the SARB’s September meeting. A further moderation in inflation is expected, especially as food prices continue to ease with the diminishing impact of El Niño.
However, our unemployment rate remained a significant challenge, rising to 33.5% in the second quarter of 2024, marking the third consecutive quarterly increase. The youth unemployment rate also surged to a staggering 60.8%, underlining structural economic weaknesses.
The Rand showed strength against the US Dollar, appreciating by 2.09% as global investors responded positively to the prospect of US rate cuts. However, commodity-linked sectors struggled, particularly mining. Iron ore and platinum prices declined by 5.60% and 5.00%, respectively, reflecting lower demand from key markets like China. Major mining stocks, including Northam Platinum, posted losses, with Northam plunging 26.10% due to weaker platinum group metal (PGM) prices.
Our funds and portfolios benefitted from an overweight exposure to risk assets, especially to South African Equities. After the outperformance in June/July, our funds are more cautiously positioned, with a reduction in global equities (from overweight to slightly underweight) and adding to global cash and short-term bond exposure. Our neutral-to-overweight exposure to South African property also helped our relative outperformance and we look to benefit from increased optimism and a possible reduction in interest rates going into September.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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