International
Global equity indices saw gains in the second quarter of 2024, largely fuelled by enthusiasm for US tech stocks and optimism about a soft landing for the US economy. This positive sentiment was bolstered by emerging signs of growth in Europe, China, and Japan. Robust performance in certain Asian markets enabled emerging market equities to surpass the gains of developed markets in Q2. For the three months ending on 30 June, the MSCI World Index posted a return of 2.6%, the MSCI Emerging Markets Index recorded a return of 5.0% and global bonds as represented by the Bloomberg Global Aggregate Bond Index returned -1.1%.
In the US, markets moved higher driven mainly by large tech companies and increasing optimism about the possibility of a Federal Reserve rate cut later this year, following a milder inflation report in June. The Consumer Price Index (CPI) decreased by 0.1% from May, bringing the annual rate to 3.0%, its lowest in over three years. When excluding the volatile food and energy sectors, the core CPI rose by 0.1% month-over-month and 3.3% year-over-year. This annual increase for the core rate is the smallest since April 2021. A 3.8% drop in gasoline prices helped curb inflation for the month, counterbalancing the 0.2% rise in both food and shelter costs. Meanwhile, the US economy saw modest growth, expanding at an annualized rate of 1.4% from January to March. This marked the slowest quarterly growth since the spring of 2022. The US economy significantly exceeded expectations by adding 272,000 jobs in May, alleviating concerns about a potential labor market slowdown. This was an increase from the 165,000 jobs added in April and far surpassed the Dow Jones consensus estimate of 190,000. At the same time, the unemployment rate rose to 4.0%, the first time it has breached that level since January 2022. Economists had been expecting the rate to stay unchanged at 3.9% from April.
In the second quarter more central banks in developed markets began to unwind their monetary tightening efforts. Canada, Sweden, and the European Central Bank (ECB) eased their policies. Despite a rise in the eurozone inflation rate, the ECB reduced its deposit rate from 4.00% to 3.75%, while expressing hesitance to commit to a specific rate path. The Bank of England and the Federal Reserve kept their rates steady at 5.25% and 5.25%-5.50%, respectively. In June, the European Union’s headline Consumer Price Index (CPI) dipped to 2.5%, while the closely watched core and services prints held steady at 2.9%. The headline figure was in line with the expectations. Inflation is expected to decrease further despite persistent inflation in services. At the same time, GDP growth improved to 0.3% year-over-year in the first quarter of 2024, compared to a downwardly revised -0.1% year-over-year in the previous quarter. Politics took centre stage in the quarter with right-wing nationalist parties making notable gains in the European parliamentary elections, especially in France. In response, President Macron called for parliamentary elections, a move that surprised the markets and led to French equities underperforming the broader eurozone index.
US equities (benchmarked by the S&P 500) hit another new record high in Q2 driven by the information technology and communication services sectors. Continued excitement about AI propelled related companies, supported by robust earnings and positive outlooks. The Magnificent Seven (Tesla, Apple, Amazon, Microsoft, Nvidia, Alphabet, and Meta Platforms) continued to support the market and posted additional gains during the quarter. The rally remained narrow, however, with the equal-weighted S&P 500 losing ground in Q2, as did the small-cap Russell 2000 index. Sectors like materials and industrials lagged. In the financial sector, several US banks revealed plans to raise dividends after successfully passing the Federal Reserve’s annual stress tests. For the quarter, the Dow Jones produced -1.4%, the Nasdaq Composite Index 8.5%, and the S&P 500 Index 4.3%.
European equities experienced a decline in the second quarter. Equities dropped due to uncertainty stemming from the announcement of parliamentary elections in France and reduced expectations for significant interest rate cuts. The information technology sector saw gains, particularly among semiconductor-related stocks. Meanwhile, the consumer discretionary sector faced declines, with weakness evident in automotive and luxury goods stocks. France’s CAC 40 returned -7.1% in Q2, while Germany’s DAX delivered -1.4%. UK equities, however, increased, with the FTSE 100 reaching new all-time highs. Additionally, this segment was bolstered by anticipated improvements for domestically focused companies after a decade of underperformance. The FTSE 100 returned 3.8% for the quarter.
Global bonds faced pressure in the second quarter as markets recalibrated their expectations regarding interest rates, alongside political and geopolitical tensions that unnerved investors. In the US, stronger-than-expected inflation data in March dampened fixed income markets, although April, May and June’s numbers indicated a slowdown in inflation. During the Federal Reserve’s June meeting, the central bank maintained interest rates for the seventh time in a row and revised its forecast to include just one interest rate cut this year. By the end of the quarter, yields on US 10-year Treasuries increased to 4.4% from 4.2% three months prior. Similarly, the yield on the 10-year UK gilt rose to 4.2% from 3.9%, while the 10-year German bund yield climbed to 2.5% from 2.3%. In general, corporate bonds outperformed government debt during the quarter, with riskier high yield bonds emerging as top performers for the second consecutive quarter.
The Japanese equity market delivered a negative return for the quarter. The Yen continued to depreciate during the quarter and the weakness was mainly attributed to the strong US dollar, bolstered by a robust US economy and expectations of prolonged higher interest rates. In March, the Bank of Japan (BOJ) implemented measures that led to a moderate increase in Japanese government bond (JGB) yields, benefiting financial stocks in Japan. The BOJ also announced plans to reduce JGB purchases starting in July. Nonetheless, these measures were insufficient to reverse the yen’s downward trend by the end of the quarter. Both the Japanese government and the BOJ expressed concerns over the adverse effects of the yen’s weakness on inflation. Additionally, real-term wage growth remained negative, as wage increases lagged behind inflation, leading to subdued consumer sentiment throughout the year. However, a record-high number of inbound tourists boosted spending, which supported consumption. The second quarter also marked the full-year earnings season, which concluded with better-than-expected results. Japanese companies demonstrated sales growth, pricing power, and effective cost control, resulting in improved corporate profitability. Despite these strong results, market sentiment was dampened by conservative earnings guidance from company management for the new fiscal year. The Nikkei index returned -1.8% for the quarter.
In Q2, China’s Q1 GDP growth exceeded expectations, coming in at 5.3% year-on-year compared to the anticipated 4.6%. However, recent fundamental data indicated renewed weaknesses, with new bank lending falling short of expectations following the PBOC’s key interest rate cuts in Q1. This was compounded by ongoing weak consumer demand and declining consumer and business confidence, among other challenges. The decline in new home prices also accelerated despite government efforts to address oversupply in the property sector and support overleveraged property companies. In May, CPI was recorded at a mere 0.3%, prompting increased calls for more interest rate cuts. However, the PBOC did not implement any further cuts during the quarter, constrained by the Yuan’s weakness. Chinese technology and consumer discretionary shares also posted strong gains during the quarter, as low valuations attracted Asia-focused investors. These investors cautiously re-entered the Chinese market amid concerns over high valuations in India and continued currency weakness in Japan. The Hong Kong’s Hang Seng Index returned 8.9% while the SSE Composite (China) index delivered -2.4%.
Local
South African markets ended the second quarter positively. April began with strong gains as optimism surrounding corporate earnings boosted domestic stocks, further supported by better-than-expected economic data. In May, the national elections became the focal point, with various surveys suggesting that the ruling ANC might lose its parliamentary majority for the first time in three decades. June’s headlines were dominated by speculation over potential alliances after the political surveys were confirmed accurate and the ANC failed to secure an outright victory at the polls. The possibility of a market-friendly outcome drove domestic equities higher by the end of the month, buoyed by the news that the ANC would form a Government of National Unity by entering into an agreement with the Democratic Alliance and other smaller parties.
On the economic front, South Africa’s economy shrank by 0.1% quarter-on-quarter in Q1 2024, falling short of market expectations and declining from the 0.3% growth seen in the previous quarter. Key sectors such as manufacturing, mining, and construction were major contributors to this contraction, as ongoing power outages (loadshedding) continued to hinder economic progress. Factory activity, measured by the PMI, dropped significantly to 43.8 in May from 54.0 in the previous month, primarily due to weak demand and election-related uncertainty. The South African Reserve Bank maintained the repo rate at 8.25%, as anticipated, citing balanced inflation risks. Annual inflation remained stable at 5.2% in May, consistent with April’s figure and slightly below the 5.3% recorded in March. On a brighter note, mining production rebounded in April, increasing by 0.7% following a sharp decline in the prior month.
The FTSE/JSE All Share Index achieved an 8.2% return in rand terms, driven by significant performances across various sectors with domestically focused businesses leading the way. Financials saw an impressive 17.1% return, Listed Property gained 5.5%, Industrials increased by 4.8%, and Resources rose by 3.5%, thanks to overall gains in commodity prices.
South African bonds delivered a 7.5% return for the quarter. As a result, the yield on the 10-year South African government bond decreased from 12.00% at the start of the quarter to approximately 11.25% by the end. Inflation-linked bonds in South Africa yielded a 2.4% return. Additionally, the Rand appreciated by 4.2% against the US Dollar, 4.1% against the British Pound and gained 5.2% against the Euro.
Source: 2IP, I-Net Bridge, BER, RMB Global Markets, Bloomberg, Stanlib Asset Management, Schroders, Stats SA, M&G, Ninety-One