August Market Commentary by RISE

Taking a look at what happened in the markets in August 2023.

Global Markets

Global markets fell in August as market participants weighed the possibility of a “no landing” scenario where strong growth allows the US to avoid a recession, following robust employment data and strong retail sales. At first glance, this statement seems ridiculous. How can strong growth lead to weaker investment markets? The link is inflation. Inflation is still above the Fed’s target, and strong demand is likely to force the Fed to hike rates further.

Chart 1: Inflation forecast range (source: Bloomberg)

China’s growth concerns also contributed to the August pullback. Economic data continues to point towards a meaningful slowdown, and the follow through on Politburo’s stimulus announcement in July has been underwhelming – as we expected. Historically, Chinese stimulus programs have had a massive impact on global growth, particularly commodity-exporting emerging markets. However, high levels of debt, and a property bubble have taken away China’s ability to stimulate growth in recent years.

Chart 2: Chinese growth remains on downward trend (source: BCA Research)

Developed market equities ended the month down 2.4% in USD while emerging market equities ended the month down 6.2% (led by Chinese equities, down 9.0%). 

In fixed income markets, Fitch Rating Agency downgraded the United States’ long-term rating from ‘AAA’ to ‘AA+’, citing a high and growing general government debt burden and a “steady deterioration in standards of governance over the last 20 years”, causing a general sell-off in bond markets (Bloomberg Barclays Global Aggregate Bond Index down 1.8%). This comes in the same month where the BRICS summit held in Johannesburg saw a massive expansion to the economic block - Iran, Saudi Arabia and the United Arab Emirates (UAE) from the Middle East; Egypt and Ethiopia from Africa, and Argentina from Latin America. Remember, BRICS was formed around a common dissatisfaction at how the dollar has established itself as the global reserve currency post World War 2. The establishment of global organisations such as the World Bank, United Nations, International Monetary Fund and the World Trade Organisation have further entrenched the dollar’s position. The BRICS union now covers almost half the world’s population. Given the lack of Fiscal discipline in the West, a structural shift in power may be in the making. It was reported that 40 countries have shown interest in BRICS’ membership.  

Chart 3: Visualising the BRICS expansion (Source: Visual Capitalist)

Local Markets

Local markets took their direction from global markets, with the JSE All Share Index falling 4.9% in ZAR. As one would expect, given the global events of August, Commodity counters led the decline, with the FTSE/JSE Resource 10 Index down 9.6% for the month. Of course, the resumption of load shedding also contributed to the poor performance and general decline in sentiment. The rand depreciated a whopping 6.1% to end the month at 18.87 to the dollar.

The JSE All Bond Composite lost 0.2% in August. Gains in the 1-3 year and 3-7 year segments of the yield curve suggest inflation expectations are falling following the low inflation print of 4.7% for July. The composite inflation-linked bond index gained 0.4%. The high interest rates in South Africa are doing their job of bringing down inflation, which gave the SARB the leeway to pause interest rate hikes in July, a much needed break for the South African consumer. The repo rate now sits at 8.25%, making cash and money market instruments an attractive proposition to South African savers.

In economic data, SA GDP came out at a pleasing 0,6% in the second quarter of 2023. This follows a 0.4% rise in the first quarter. Furthermore, the results of the Quarterly Labour Force Survey (QLFS) indicated that the number of employed persons increased by 154 000 to 16,3 million in the second quarter of 2023 compared to the first quarter of 2023. The official unemployment rate is now 32.6%

Chart 4: SA sector contribution to GDP (source: StatsSA)

Chart 5: SA employment still not at pre-covid levels (Source: StatsSA)

ON THE RISE

Source: Infront

Comments from RISE's Chief Investment Officer, Duane Gilbert

Despite the pullback in August, global markets remain resilient. Markets are confident that a recession will be avoided. We feel this is unlikely given the aggressiveness of interest rate hikes, at a time where global growth is fragile. Even if a recession can be avoided, valuations are too sanguine given the rapid withdrawal of liquidity, low global growth and high geopolitical risks. Fundamentally, the market environment remains unsupportive. As a result, we maintain a conservative positioning in our portfolios. Our exposure to global equities is low. Within equities we have taken a more defensive stance, favouring US quality equities and defensive sectors. We have a high allocation to global bonds which provide a strong hedge during a recession. South African equities are particularly cheap but vulnerable to a global sell-off. One needs to carefully pick companies that can grow their earnings in a low growth environment.

Our portfolios have a high allocation to SA Bonds (where longer-dated instruments are still offering double-digit yields) and exposure to commodity backed loans. We also hold a lot of cash in our portfolios. We prefer USD over ZAR. The sharp weakness we saw in August on the back of rather mild news is testament to how fragile the ZAR is. Our large cash position gives us the dry powder we need to take advantage of bargains that may arise from a market sell-off. Finally, we have a position in renewable energy infrastructure projects, which are not only attractive from an IRR perspective but will meaningfully increase electricity production and reduce carbon emissions in South Africa.