October brought a series of market movements, from global equities facing pressure to local South African developments shaping investor sentiment. Here’s a breakdown of the key highlights and what they mean for your portfolio.
Global Markets
US Equities Hold Back
October was a rather uneventful month for developed markets equities with market participants focused on the US elections in November. US equities ended the month down 0.7% in USD, giving up the gains they experienced in September.
Europe Struggles with Growth and Currency Pressure
European equities ended the month down a whopping 5.9% as growth prospect continue to decline and the dollar continues to gain strength – this is a worrying trend.
Emerging Markets Feel the Pinch
Emerging markets had a tough month (MSCI Emerging Market down 4.3%) after the stimulus announced by the Chinese Government in October proved to be insufficient to reignite growth.
Chart 1: Summary of Chinese Government Stimulus Package (Source: ThinkChina)
Global bonds had a poor month with the Bloomberg Barclays global aggregate bond index ending the month down 1.5%. Strong US economic data, including a Q3 2024 GDP reading of 2.8% and a decrease in the unemployment rate to 4.1% contributed to higher real yields. The dollar strengthened by 1.8% on the back of higher treasury yields and declining investor sentiment towards emerging markets equities and bonds.
Gold Shines Amid Geopolitical Risks
The gold price continued to rise in October, finishing the month up 4% at $2,734 an ounce despite the stronger dollar and higher bond yields. The higher gold price was driven primarily by higher geopolitical tensions in the Middle East, and speculative retail demand from China. Central Banks, China and Russia in particular, continue to buy gold to diversify away from the US dollar.
Chart 2: Gold vs (inverted) Real 10-Year Treasury Yield (Source: Longtermtrends.net)
Local Markets: Mixed Performance in October
Local equities fell 0.9% in ZAR during the month of October. The Financials 15 Index ended the month down 0.7%, while the Industrial 25 Index ended the month down 3.0%. The Resources 10 Index ended the month up 2.5% on the back of a higher gold price.
SA Property’s Stellar Year
SA property ended the month down 2.8%. After a spectacular rerating over the past few months, SA property is now up 51.6% over one-year.
Chart 4: SA Property Recovery
Debt Concerns Cloud Fiscal Outlook
In economic news, Finance Minister Enoch Godongwana delivered the GNU’s first Medium Term Budget Policy Statement in October. Unfortunately, it did little to address the country’s burgeoning debt problem. Debt to GDP remain forecasted to reach 75% by 2027/2028. Markets did not react well to the MTBPS. The JSE All Bond Composite lost 2.8% for the month and the rand lost 3.8% to the dollar for the month.
Chart 5: Consolidated Budget Framework (Source: Nedbank)
Energy Reforms Offer Hope
The National Energy Regulator of South Africa (NERSA) granted four new energy trading licenses within Eskom service areas. NERSA has now issued a total of ten trading licenses. Effectively, private (renewable energy) power producers with licenses will be able to supply electricity to businesses directly via Eskom transmission lines, undercutting Eskom. In time, this move should bring down the cost of electricity significantly, and support more renewable energy investments in the country. Both South African businesses and consumers stand to benefit. Eskom is now challenging NERSA’s decision in court.
Chief Investment Officer, Duane Gilbert’s Commentary
Our market outlook for 2024 remains bullish. Falling interest rates globally will be supportive of equity markets. Bond yields remain under pressure as investors rotate their portfolios into equities.
The US remains our destination of choice – growth stocks and small caps in particular. Growth rates in Europe, China and Japan continue to disappoint.
Emerging markets, South Africa in particular, have been the flavour of the day for the past few months but this trend is reversing. We expect the rand to remain under pressure as our government continues to accumulate debt.
South African equities are particularly cheap but vulnerable to global sentiment. One needs to carefully pick companies that can grow their earnings in a low growth environment. We maintain a low exposure to South African government bonds. We prefer exposure to high-quality secured credit. We maintain a modest cash position, which gives us the dry powder we need to take advantage of bargains that may arise from any market sell-off.
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