The table below provides a review of key domestic and international investment indicators for the past quarter, as well as over longer periods.
South African asset classes (in rands)
(Performance over periods to 30 June 2023)
Source: Morningstar
Global asset classes (in dollars)
(Performance over periods to 30 June 2023)
Source: Morningstar
Currencies
(Movements over periods to 30 June 2023)
* Updated annually from 1900, or longest available period
Returns for periods longer than 12 months are annualised
INTERNATIONAL MARKET COMMENTARY
The second quarter of 2023, despite many challenges and ongoing uncertainties, saw global markets post yet another set of strong equity returns after what was an already solid start to the year. Investor experiences may differ substantially, however, as the rally seen during the quarter and year to date was very ‘narrow’, concentrated in only a limited number of sectors, regions and stocks. Big ‘tech’ has essentially been the place to be, with the Nasdaq for example up +32% year to date, large-cap technology related stocks have benefited from declining interest rates at the start of the year, a flight to quality stocks over the US regional banking crisis, and more recently the hype over artificial intelligence. Outside of this area, gains have been much more limited with market movements dominated by hawkish (tightening) central bank action due to persistent (sticky) inflation, mixed but slowing economic data, disappointing Chinese activity levels (after the initial Q1 reopening jump), and US political shenanigans.
The start of the quarter was a relatively quiet month, especially in comparison to March and Q1 more broadly. Ironically, the lack of sustained concern regarding the banking system in April (notwithstanding lingering question marks about the future of First Republic Bank in the US) refocussed markets attention back to the possibility of further interest rate increases by central banks; especially given signs of more persistent underlying inflation. May was a slightly bizarre month, with markets having one eye on the US debt ceiling ‘pantomime’ and the other eye on anything related to artificial intelligence (AI). Thankfully, an agreement was reached at the end of month that enabled the US debt limit to be increased, whilst this was broadly expected, surprises can happen especially when emotional humans are involved.
Interestingly, market attention during May was also focussed on something completely unhuman, this being the frenzied search for stocks benefiting from AI, given the recent hype around tools such as ChatGPT (an AI chatbot). The moves propelled technology stocks such as Nvidia (which make processors and software for this area) into a select group of companies’ worth over US$1trillion, pushed it to even more stretched valuations (P/E 193), and extended the rally in what has been a very narrow number of mega cap stocks this year. The end of the quarter witnessed continued monetary policy tightening from central banks around the world as inflation remained stubbornly high and whilst the Fed decide not to raise rates in June, it was seen as a ‘hawkish skip’ rather than a pause given the subsequent rhetoric and its own forecasts revealed further interest rate increases this year. Interestingly, Apple closed the quarter with a market capitalization above US$3trillion, marking a first for a publicly traded company.
How has this translated to financial markets? Overall, it was another good quarter for returns, with global equities (+6,3%) posting a strong gain as seen in Q1. However, there was significant divergence in terms of returns experienced regionally. Continued loose monetary policy by the Bank of Japan, drove significant gains within Japanese equities (+15,6%) in local currency terms, whilst negative for the yen it was seen as being supportive for earnings growth. Apart from Japan, the US (+8,6%) was the only other major market that managed to generate a strong positive return during Q2, aided by its relatively high weight to the information technology sector and the related hype around AI. Returns elsewhere – Europe ex UK (+1,8%), Asia ex-Japan (-0,2%), and UK (-0,6%) – were more disappointing with a combination of differing stock market constituents, slowing economic growth, and tighter momentary policy acting as a headwind for returns. In terms of style, growth stocks (+9,3%) outperformed the more value / cyclically (+3,2%) orientated equities by a significant margin. This was to some extent a reflection of sector performance, with Information Technology (+13,7%), Consumer Discretionary (+8,3%), and Communication Services (+7,1%), the best performing areas. At the other end of the Real Estate (-4,0%), Materials (-0,8%) and Utilities (+0,2%) sectors trailed the most.
Within fixed income markets, the combination of ‘hawkish’ central banks (due to concerns around the risk of ‘sticky’ inflation) with increased risk appetite, meant riskier parts of the bond market outperformed traditional safe havens. Looking at the detail, global government bond prices were overall flat (+0.2%), although UK Gilts (-5.4%) significantly underperformed due to higher-than-expected inflation data. Global investment grade credit (+0.0%) generated a similar return over the quarter as government bonds, but at the risker end of the credit spectrum global emerging market debt (+1,5%) and global high yield (+1,6%) outperformed.
In terms of real assets, the more economic sensitive commercial property markets underperformed global equities over the period with the global REITs index (0,5%) flat over the period. Global listed infrastructure (0,2%) also lagged equities, as the expectation of further rate rises weighed on this more interest rate sensitive area. Commodities (-2,6%) overall declined during the quarter, however, there was significant divergence across the different markets. Whilst agricultural commodities were broadly unchanged (-1,0%), strong risk appetite and increasing interest rate expectations weighed on Gold (-2,5%). Lower demand prospects due to slowing economic activity, especially coming from China, was a drag on Industrial metals (-10,5%) and Crude Oil (-4,5%) during the period.
DOMESTIC MARKET COMMENTARY
Locally, headline inflation for the year to March 2023 increased to 7,1% from 7,0% the previous month, with core inflation remaining at 5,2%. The South African Reserve Bank (SARB) released a hawkish Monetary Policy Review, highlighting the more persistent components of inflation. The FTSE/JSE All Bond Index declined by 1,1% in April. The rand depreciated by approximately 2,7% against the US dollar in April, nonetheless, domestic equity markets rallied in April, supported by a recovery in resources and financials, while industrials continued to benefit from rand weakness.
In May South Africa’s neutral stance on the Russia Ukraine conflict was called into question by claims from the US Ambassador Reuben Brigety that arms were sold to Russia earlier this year. Concerns that this would further weaken the country’s chances of retaining preferential trade access to the US via trade agreement AGOA and the possibility of explicit or implicit sanctions to follow, sent the currency in a downward spiral. This further increased the stakes for investors already contending with the ongoing energy crises.
Meanwhile, the energy crisis and a stronger US dollar weighed on the currency in a meaningful way. Actions from the SARB (which lifted the bank’s key lending rate by 50 basis points to 8,25% with a unanimous vote), provided little relief. The rand depreciated by approximately 7,9% against the US dollar in May, bringing the decline year to date to a painful 16,0%. Pricing of local bonds reflected a myriad of investor concerns, many of which contributed to the risk of deteriorating fiscal dynamics. The FTSE/JSE All Bond Index declined by 4,7% in May.
In the final month of the quarter, first quarter GDP printed at 0,4%, largely in line with expectations, helping the country avoid a technical recession. Nonetheless, sentiment recorded in the period amongst the business community as well as consumers remains depressed. The National Health Insurance (NHI) bill was passed by the National Assembly, despite much uncertainty around funding, ongoing opposition, and legal challenge. With some light reprieve from loadshedding over the month, the ongoing efforts to solve the energy crisis remain at the front of investors’ minds. Meanwhile, headline inflation for the year to May 2023 declined to a 13-month low of 6,3% from 6,8% the previous month, with core inflation at 5,2%. While lower energy prices and base effects played a role, a moderation in food prices was encouraging. Producer inflation also continued to trend lower.
Against this backdrop, domestic assets recovered some lost ground, following the rout in May. Pricing of local bonds recovered over the month, all but reversing the losses from the prior month. The FTSE/JSE All Bond Index gained 4,6% in June, still leaving returns over the quarter at -1.5%. The rand also appreciated by 4,5% against the US dollar in June, bringing the decline over the quarter to 5,9% and year to date, to a meaningful 10,7%. The FTSE/JSE All Share gained 1,4 in June with higher returns from the Shareholder Weighted and Capped indices. The recovery in June was led by financials (11,4%) and industrials (3,7%), while resources were under pressure (-8,2%). Banks and retailers recorded a noteworthy recovery, gaining 13,0% and 16,1% in June. Naspers and Prosus shareholders welcomed the prospect of a simplified shareholder structure, which helped the pair gain 14,2% and 6,2% respectively in June. Similar trends set the tone for the quarter. The property sector gained 0,9% in June, concluding a positive second quarter at a marginal 0,7%.
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