South African Equities Shine as Global Momentum Builds

From U.S. resilience to rising commodities, global markets continue to offer opportunity for growth-focused investors. Importantly, these same forces are now setting the stage for a more constructive outlook in South Africa.More from EasyRetire CIO Duane Gilbert .

Summary

• Europe outperformed all regions with a 3.4% gain, driven by strong banking sector profits that helped offset political uncertainty in France.
  
  
• Gold prices surged to record highs, reflecting investors’ search for safe-haven assets, while oil prices slipped on weaker global demand expectations.
  
  
• South African equities rallied 3.4% in August, led by a 12% jump in resource stocks thanks to soaring gold prices, even as local business activity indicators softened.

Global Markets

Global equities advanced again in August, but the rally was accompanied by heightened political tension and growing questions around central bank independence. Developed markets rose 2.6% in USD terms, while emerging markets added a more modest 1.3%. The U.S. delivered a solid 2.0% gain, supported by strong earnings and firmer economic data, but it was Europe that outpaced peers, climbing 3.4% in USD terms as robust bank profits helped offset political headwinds in France. In Asia, Chinese equities extended their rebound on the back of renewed policy support and a continuation of the trade truce with Washington.

The macro backdrop was uneven: U.S. payroll data pointed to a slowing labour market, while inflation remained steady. Political shocks in Washington — including President Trump’s attempt to dismiss Fed Governor Lisa Cook — unsettled investors and underscored the fragility of institutional independence. Commodities sent mixed signals: gold surged to new highs as risk hedging intensified, while oil prices slipped on softer demand expectations.

Chart 1: Gold price breaks out (Source: Trading Economics)

Equities: Earnings Resilience, Europe Outperforms

Corporate earnings continued to surprise to the upside. The second-quarter reporting season delivered aggregate results well ahead of consensus, with technology once again leading. Nvidia posted strong overall sales and earnings, although weakness in its data centre division tempered enthusiasm. The S&P 500 returned 2.0% in August, extending its year-to-date rally, though market breadth narrowed as mega-cap names drove performance.

Europe outperformed, with the MSCI Europe ex-UK Index rising 3.4% in USD terms. Banking sector earnings provided a lift, even as political tensions in France generated volatility. In Asia, sentiment was supported by policy pledges from Beijing and an extension of the U.S.–China tariff truce until November. Chinese technology stocks benefited from the government’s ambitious pledge to triple domestic chip supply by 2026. The MSCI Emerging Markets Index gained 1.3%, though regional performance diverged: China and Taiwan led, while South Korea lagged on the back of new tax measures, and Indian equities struggled after the U.S. imposed steep tariffs on selected imports.

U.S. Macro: Slowing Jobs, Stable Inflation

The U.S. economy remained resilient but showed signs of cooling. The second estimate of Q2 GDP growth was revised up to 3.3% annualised, confirming a strong rebound from Q1’s contraction. Inflation was steady, with headline CPI unchanged at 2.7% year-on-year in July, matching June’s level and below forecasts of 2.8%. Employment data were softer: nonfarm payrolls rose by just 114,000 in July, while the unemployment rate edged up to 4.2%, reflecting a moderation in labour market momentum. Consumer confidence also faltered, with the University of Michigan sentiment index slipping to 58.2 in August from 61.7 in July.

The Fed’s annual Jackson Hole symposium provided further direction. Chair Jerome Powell acknowledged that the “balance of risks” had shifted, signalling that weaker labour market conditions could justify policy easing. Futures markets responded by pricing in a high likelihood of a 25 basis point rate cut in September. Political pressure, however, intensified after President Trump dismissed the head of the Bureau of Labor Statistics and attempted to fire Fed Governor Lisa Cook. Markets interpreted these moves as a challenge to central bank independence, adding volatility to Treasury yields and weighing on the dollar.

Chart 2: US Labor market slow but not spiralling (Source: Alpine Macro)

Europe: Political Turbulence Meets Economic Stabilisation

European equities outpaced global peers in August despite renewed political instability in France. Prime Minister Gabriel Attal called a confidence vote in early September after failing to secure support for budget measures, raising the risk of fresh parliamentary elections. French bond markets underperformed as spreads widened, reflecting investor unease with the country’s fiscal deficit of nearly 6% of GDP.

Elsewhere, euro area data provided some relief. Consumer price inflation edged up to 2.1% in August, slightly above expectations, while unemployment improved to 6.2% in July from 6.3% previously. Manufacturing activity showed signs of turning a corner, with the Eurozone Manufacturing PMI rising to 50.7 in August from 49.8 in July, the first expansion since 2022. Business surveys pointed to rising orders and increased output, though cost pressures and energy uncertainty remain challenges.

In the UK, data pointed to a complicated backdrop. Inflation accelerated to 3.8% in July, the highest since January 2024, driven by sharp increases in transport costs, while the Bank of England cut rates by 25 bps to 4.0%, the lowest since March 2023. The decision, passed by a narrow 5–4 margin, underscored the policy dilemma of managing stubborn inflation against a slowing economy. Preliminary estimates showed Q2 GDP growth at 0.3% q/q, down from 0.7% in Q1 but ahead of forecasts, while unemployment held at 4.7%.

Asia: China Supported by Policy, Japan Holds Steady

China extended its recovery momentum, helped by continued policy support and trade reprieve. The government reiterated its growth commitment and announced a target to triple chip supply by 2026, boosting technology shares. On the macro front, consumer prices were flat in July (0.0% YoY), defying expectations of a slight decline. The PBOC left lending rates unchanged for the third consecutive month, with the one-year LPR at 3.0% and the five-year at 3.5%. The labour market softened, however, with unemployment rising to 5.2% in July from 5.0% previously.

Japan’s inflation rate eased further to 3.3% in July, continuing its gradual decline. The Bank of Japan left its short-term policy rate at 0.5%, unchanged since earlier this year, maintaining its cautious normalisation approach amid still-uncertain wage dynamics.

Fixed Income & FX: Yields Diverge, Dollar Under Pressure

Bond markets reflected both political risk and shifting monetary expectations. U.S. Treasuries returned 0.9% in August, as Powell’s Jackson Hole speech reinforced the likelihood of near-term rate cuts. The yield curve steepened: front-end yields fell on policy expectations, while long-dated yields rose as concerns over political interference at the Fed dented confidence.

European bonds diverged. French government debt underperformed on domestic political risk, while core eurozone yields rose modestly on firmer growth and inflation data. UK gilts rallied modestly after the Bank of England’s rate cut, though gains were capped by the upside inflation surprise.

In currency markets, the U.S. dollar weakened to multi-month lows, pressured by expectations of Fed easing and political turmoil. The euro strengthened modestly, supported by improving manufacturing data, while the yen held steady as investors balanced relative rate differentials against Japan’s cautious policy stance.

Chart 3: Dollar resumes downward trend after brief pause (Source: Trading Economics)

Local Markets

South African equities moved in step with global markets in August, with the JSE All Share Index gaining 3.4% for the month. Performance was resource-driven as gold miners surged on record bullion prices: the Resources index advanced 12.0%, while Financials rose 1.1% and Industrials added 1.2%. Domestic bonds delivered a modest 0.7% return, reflecting lighter foreign demand and higher issuance, while the rand appreciated 3.1% against the US dollar, and strengthened 0.8% versus the euro and 1.0% against sterling.

Underlying activity data painted a mixed picture. The S&P Global South Africa PMI slipped to 49.8 in August from 50.3 in July, signalling a return to contraction as export demand weakened and firms pared back output. Employment continued to expand, but at a slower pace, and business confidence was cautious. The Absa Manufacturing PMI eased to 49.4, down from July’s nine-month high of 50.8, as new sales orders softened and purchasing activity declined. Broader sentiment deteriorated: the SACCI Business Confidence Index dropped to 114.5 in August from 116.7, weighed by rand volatility earlier in the month and pressure on domestic demand. These readings underscore that while headline equity and currency performance was robust, momentum on the ground remains uneven.

Policy developments stayed in focus. Having cut rates at its July meeting, the South African Reserve Bank kept the repo rate unchanged at 7.00% in August, noting that inflation expectations had moderated but risks from global tariffs and domestic wage settlements persisted. Headline CPI was steady at 3.0% year-on-year in July, at the lower end of the 3–6% target range, while inflation expectations for 2025 remained anchored below 4%. With real rates still elevated and growth indicators softening, the SARB signalled that it retains scope to ease further should conditions allow but stressed a data-dependent approach.

Chief Investment Officer, Duane Gilbert’s Commentary

Our core outlook remains constructive on risk assets, particularly global equities. While macro uncertainty persists, the combination of fiscal expansion in the US, easing trade tensions, and a weakening US dollar provides a supportive backdrop for pro-growth positioning. We continue to favour equities over bonds and maintain an underweight allocation to cash, reflecting our conviction that the opportunity cost of staying on the sidelines remains elevated.

Within global equities, the US remains our preferred market. Strong consumer fundamentals, improving corporate margins, and renewed fiscal stimulus reinforce our belief in the resilience of the US economy. We are maintaining a structurally overweight position here. In contrast, we remain underweight Europe, where structural impediments, weak productivity dynamics, and political fragmentation continue to limit upside potential. In terms of portfolio orientation, we have tilted further toward cyclical and pro-growth exposures. The combination of falling real yields, a softening dollar, and policy-driven demand is bullish for commodities. We have increased our allocations to both gold and industrial metals, which we see as effective hedges against macro instability and key beneficiaries of global reflation dynamics.

Importantly, we are beginning to see a more constructive setup for South Africa. A softer dollar trend and rising global commodity prices are meaningful tailwinds for the domestic economy. In light of this shift, we have reallocated a portion of our global equity exposure—particularly from developed markets outside the US—into South African equities. We believe this move will allow us to take advantage of a potentially improving local macro environment. Our domestic equity positioning remains selective, with a focus on companies capable of delivering earnings growth in a still-constrained fiscal landscape.

We remain underweight South African government bonds due to long-term structural concerns, but we continue to favour high-quality, secured credit. Our moderate cash position gives us the flexibility to respond quickly to market dislocations or tactical opportunities.

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