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 September 2023)
Source: Morningstar
Global asset classes (in dollars)
(Performance over periods to 30 September 2023)
Source: Morningstar
Currencies
(Performance over periods to 30 September 2023
Source: Morningstar
* Updated annually from 1900, or longest available period
Returns for periods longer than 12 months are annualised.
INTERNATIONAL MARKET COMMENTARY
The third quarter of 2023, despite a good start, was a difficult one for markets overall, primarily due to a big move higher in government bond yields. Moves in bond yields impact most financial assets as investors attempt to value investments through present valuing future cash flow streams. And if the discount rate (government bond yield) moves higher the present value of those cashflows declines. There were several good reasons during the quarter for the increase in bond yields, despite a general picture of slowing inflation. Firstly, the Bank of Japan surprised the markets by modifying part of its monetary policy, this change was seen as a step towards policy normalisation / tightening and resulted in higher Japanese government bonds yields. Secondly, the downgrade of the US government credit rating from AAA to AA+ (by Fitch Ratings) and higher-than-expected US bond issuance. Thirdly, the concern that rising oil prices, due to restrictions in output by Saudi Arabia and Russia, will feed into future headline inflation numbers. Finally, and perhaps most importantly toward the end of the quarter central bank rhetoric led to a broader realisation by markets that whilst most central banks are close to finishing raising rates, interest rates will stay higher for longer.
Concerns surrounding China’s property sector resurfaced after fears that Country Garden, one of Chinese largest property developers, would default on some of its debt. China’s property market has struggled ever since Evergrande defaulted in 2021, after years of speculation and over-investment. Related to which, worries around China’s lacklustre economic recovery since the economy reopened and lack of sufficient government stimulus remained in focus. Elsewhere, stagflation concerns increased in Europe with the release of weak economic survey data. The outlook for inflation figures was not helped by the recent rise in energy prices. Economic data out of the US (whilst more resilient than other areas), also showed some signs of softening.
How has this translated to financial markets? Overall, it was a challenging quarter for returns, with global equities (-3,3% in USD terms) posting declines over the quarter. However, there was significant divergence in terms of returns experienced regionally. The UK equity market (2,6%, in local currency terms) benefited from its relatively high weight to the energy sector with oil stocks generating by far the best returns for the period. Apart from the UK, Japan was the only other major market that managed to generate a positive return during Q3, Japanese equities despite recent changes continued to be supported by the relatively loose monetary policy of the Bank of Japan. Europe ex UK (-2,1%) and Asia ex-Japan (-2,1%) were more disappointing with a combination of differing stock market constituents, slowing economic growth, and higher bond yields acting as a headwind for returns. In terms of style, growth stocks (-4,9%) underperformed the more value / cyclically (-1,6%) orientated equities on a relative basis. This was to some extent a reflection of sector performance, with Information Technology (-6,1%), among the laggards for the period. However, the biggest declines were the more interest rate sensitive sectors such as: Utilities (-8,3%), Real Estate (-7,3%) and Consumer Staple (-6,1%). At the other end of the spectrum, Energy (10,9%), Communication Services (0.5%), and Financials (-0,7%) were the best performing sectors.
Within fixed income markets, the rise in government bond yields due mainly to the higher for longer rhetoric by central banks, meant most bond markets fell during the period. Looking at the detail, global government bond prices declined (-3.6% in USD terms) during the quarter.
In terms of real assets, listed property and infrastructure stocks declined more than equities over the quarter, with global listed infrastructure (-8,1%) and global REITs index (-6,0%) both falling sharply, due to their higher sensitivity to interest rates. Commodities (4,7%) was one of the few places to post a positive return over the quarter, however, performance diverged significantly across the different markets. Crude Oil (31,7%) was by far the strongest area, buoyed by additional supply cuts by Saudi Arabia and Russia. Industrial metals (3.5%) generated more moderate gains in anticipation of further stimulus by the Chinese government to spur economic activity. Agricultural (-3,2%) prices fell due to better grain production. Finally, Gold (-3,9%) was also weak, on the back of higher for longer interest rate expectations and a stronger US dollar.
DOMESTIC MARKET COMMENTARY
A formal government announcement confirmed Russian President Putin would not be attending the BRICS summit in person, removing the uncertainty on the matter and an overhang for local markets. Loadshedding intensified again in July after some reprieve the prior month. Local economic gauges languish at weak levels, signalling weak domestic demand pared with moderating external demand. While only a few months data had been accounted for, the fiscal data for June confirmed weak tax receipts, especially from corporates. Nonetheless, domestic assets gained ground over the month of July, benefitting from gains in emerging markets.
The BRICS summit concluded with the expansion of membership to six more countries in August, outside of agreements that would see specific sectors benefit from improved access or trading terms, South Africa also received a R500m grant and R167m worth of power equipment from China to help with the current energy crises. Also noteworthy is a loan agreement with the New Development Bank (NDB) to fund a further phase of the Lesotho Highlands Water Project. Operation Vulindlela, released a progress report for the second quarter, including milestones for reforms in key areas such as telecommunications, visa system, logistics, water and energy
In the final month of the quarter, second quarter GDP printed at 0,6%, beating market expectations. The current account deficit increased to 2,3%, reaching levels last seen in 2019. Loadshedding worsened over the month, however a unit at Kusile Power Station was brought back online ahead of schedule, which should help with energy availability. Meanwhile an outbreak of bird flu across the country sparked concerns. The Monetary Policy
Committee (MPC) of the South African Reserve Bank (SARB) kept the bank’s key lending rate on hold at 8,25%, with three members voting in favour of the pause and two for a 25bps hike. The tone of the statement remained hawkish given a plethora of risks that could impact the progression of inflation.
Against this backdrop, domestic assets retreated further in September as risk off sentiment persisted. Local bond markets felt the pressure of higher global bond yields, with the FTSE/JSE All Bond Index losing 2,4% in September and 0,3% over the quarter. Despite persistent volatility, the rand depreciated by a marginal 0,5% against the US dollar in the third quarter, bringing the decline year to date to 11,3%. Local equity markets ended the quarter in the red, with the FTSE/JSE All Share trading down 3,5% with declines across resources (-5,4%) and industrials (- 6,8%) and gains for financials (2,0%). Third quarter returns from index bellwethers, Naspers (- 11,0%) and Prosus (-11,7%) mirrored losses from Chinese technology company Tencent (-7,7%), while also pricing portfolio revaluations. Mid and small cap stocks outperformed their large cap counterparts over the quarter. The property sector (-4,1%) underperformed other asset classes in September, brining returns over the quarter to -1,0%.
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