International
In the third quarter of 2024, global financial markets experienced significant volatility, influenced by a mix of economic indicators, a move by major central banks towards more accommodative monetary policies and ongoing geopolitical tensions. Equity markets sustained their robust performance throughout the third quarter. Developed market stocks, as represented by the MSCI World Index, delivered a total return of 6.4% in Q3, up from 2.6% in Q2. Meanwhile, emerging market stocks, tracked by the MSCI Emerging Markets Index, surged by 8.7% in Q3, an increase from 5.0% in Q2. Emerging market equity returns were led by strong performances from China, South Africa and India. The move towards more accommodative monetary policies helped fuel a surge in the global bond markets, with the Bloomberg Global Aggregate Bond Index posting a 7.0% return for the quarter.
In the US, investor sentiment toward equities cooled slightly as the market awaited the Federal Reserve’s decision on interest rates. Although the anticipated rate cut came as no surprise, the Fed caught markets off guard in September by cutting rates by 50 bps instead of the much anticipated 25 bps, marking the beginning of its first easing cycle in four years. This sharp cut was a response to signs of moderating inflation and a softening labor market. The focus has now shifted to the scale of future rate cuts, with concerns about a potential US recession held at bay for the time being. Fed Chair Powell’s comments helped reassure markets, suggesting that future rate reductions would likely be smaller and dependent on economic data and inflation trends. In September, the Consumer Price Index (CPI) increased by 2.4% year-over-year, slightly surpassing the expected 2.3% but lower than the 2.5% recorded in August. The second quarter GDP exceeded expectations, growing at an annualized rate of 3.0%, mainly driven by strong consumer spending, while the revised first-quarter GDP came in lower at 1.3%. The Fed held its 2024 growth forecast steady at 2.1%.
In the Euro area, the European Central Bank (ECB) delivered a quarter-point interest rate cut during its September meeting, marking its second reduction to the deposit rate this year. The widely anticipated move came after a period of sluggish economic growth across the euro zone and cooling inflation, which fell below the central bank’s 2.0% target in September. The September CPI figure came in at 1.8% year-over-year. The reading was in line with expectations. Second-quarter GDP growth for 2024 exceeded expectations at 0.6% year-over-year. The ECB lowered its 2024 growth forecast to 0.8%, down slightly from an earlier projection of 0.9%.
In the UK, the Bank of England (BOE) maintained its main interest rate at 5.00% during its September meeting, following a cut from 5.25% to 5.00% in August. The UK’s Consumer Price Index (CPI) experienced a significant decline in September, dropping to 1.7%, surpassing expectations of a decrease to 1.9% and down from 2.2% recorded in August. The British pound fell against the U.S. dollar and euro following the cooler-than-forecasted print as economists said a November rate cut from the Bank of England looked more likely. UK GDP grew by 0.7% in Q2 2024, slightly below forecasts, following 0.3% year-over-year growth in Q1, with underlying growth showing signs of weakness in the first half of the year. In the UK National Election on July 4, the Labor Party won a decisive victory, ending the Conservative Party’s 14-year rule. Although pre-election uncertainty caused some market volatility, the result was largely anticipated by local financial markets.
US equities (benchmarked by the S&P 500) faced a turbulent Q3, experiencing both the sharpest one-day drop and the strongest rebound since 2022, triggered by a weak jobs report in early August that raised concerns of a potential recession. However, those fears were tempered by the Federal Reserve’s unexpected 50 basis point rate cut, allowing the S&P 500 to close the quarter in positive territory.
The equal-weighted S&P 500, which minimizes the impact of large-cap tech stocks, outpaced the market-cap weighted index, signaling a more widespread rally. The small-cap Russell 2000 index also outperformed larger indexes, buoyed by expectations of future rate cuts. Meanwhile, disappointing earnings from major tech companies cast doubts on their valuations, with the ‘Magnificent 7’ underperforming the broader market for the first time since late 2022. Technology and energy sectors lagged, while interest-sensitive sectors like utilities and real estate led the gains. The Dow Jones gained 8.6%, the Nasdaq increased by 2.8%, and the S&P 500 rose by 5.9%.
European equities gained ground in the third quarter, closing just below record highs. However, they underperformed compared to other major regions, particularly the US and Asia excluding Japan. As inflation decreased and economic activity slowed in France and Germany, the Eurozone’s two largest economies, the European Central Bank made another interest rate cut in September, following a previous reduction in June. At the sector level, real estate and utilities stocks were investor favorites, as they are expected to benefit from lower interest rates. In contrast, information technology stocks saw the weakest performance, reversing their previous upward trend. Energy stocks also lagged as oil prices dropped. France’s CAC 40 rebounded with a 2.2% return in Q3 after a 7.1% decline in Q2, while Germany’s DAX delivered a strong 6.0% return for Q3. UK equities also delivered positive returns in the third quarter. Smaller, UK-focused companies in the FTSE 250 outshone the larger, globally oriented firms in the FTSE 100. The FTSE 100 Index returned 1.8%.
Global bonds advanced during the quarter as more central banks initiated interest rate cuts. The highlight was the Federal Reserve’s larger-than-expected 50 basis point rate cut, though Fed Chair Jerome Powell signaled that future cuts would likely be smaller. US economic data continued to show declining inflation, with the annual rate of inflation hitting 2.4% in September. In the bond markets, 10-year US Treasuries delivered a return of 5.8% for the quarter, with the yield dropping to 3.8%. The prices of 10-year German bunds and UK gilts also increased, returning 3.7% and 2.5%, respectively. US corporate bonds performed well, returning 5.7%, outpacing both European and UK corporate bonds. Meanwhile, US high-yield bonds posted a 5.4% return.
On the final day of July, the Bank of Japan made an unexpected decision to raise interest rates by 15 basis points, moving them from a range of zero to 0.10% up to 0.25%, marking the highest level since 2008. This shift signaled a more aggressive policy approach than anticipated and caused significant fluctuations in local equity markets and high-yield currencies. Japan’s core Consumer Price Index (CPI) for August increased by 2.8% year-over-year, in line with expectations, marking the fourth consecutive month of acceleration. At its September meeting, the Bank of Japan held its benchmark interest rate steady at 0.25%, as anticipated, as part of its efforts to gradually shift away from an extended period of ultra-loose monetary policy while supporting economic stability. Japan’s economy expanded at an annualized rate of 2.9% in the second quarter, exceeding the forecasted growth of 2.1%. The Nikkei 225 Index saw a steep drop in early August but managed to recover some of the losses by the end of the month. The index dropped 3.5% during the third quarter. China’s equity markets regained momentum toward the end of Q3 after a quiet July and August in terms of government intervention. While there were some positive economic data points throughout the quarter, the overall economy remained under pressure, and challenges in the property sector persisted. Investor expectations for significant policy announcements at the Third Plenum in July were unmet, leading to market agitation. August saw increased volatility driven by weak domestic data and global economic concerns. Optimism returned in late Q3 with Beijing’s announcement of a coordinated stimulus plan. The People’s Bank of China (PBoC) introduced an RMB800 billion initiative to support stock buybacks and investments in domestic equities, alongside reducing the main policy rate from 1.7% to 1.5% and cutting the reserve requirement ratio for lenders by 0.5%. In the property market, the PBoC eased restrictions, lowering mortgage down payments for second homes from 25% to 15% and directing lenders to cut mortgage rates further by October. The stimulus measures boosted market sentiment, although concerns about economic stability persist. The focus on stimulating domestic consumption increased expectations for further fiscal action. The Hong Kong’s Hang Seng Index returned 21.5% while the SSE Composite (China) index delivered 12.4%.
Local
South Africa experienced a lift in market sentiment following a favorable election outcome, which continued to drive positive revaluations across various asset classes amid improving economic conditions. In the second quarter of 2024, the economy expanded by 0.4% quarter-on-quarter, recovering from flat growth (0.0%) in the first quarter. Household consumption played a key role in driving this growth, indicating renewed consumer confidence and spending power. Although first-half economic output slightly fell short of expectations, the South African Reserve Bank (SARB) has projected growth of 0.6% for the next two quarters. Medium-term growth forecasts have improved, driven by increasing confidence, a stable electricity supply, and ongoing reform efforts. However, investment remains a concern, having declined for four consecutive quarters, underscoring the importance of investment recovery for sustained economic growth.
The annual inflation rate in South Africa fell for a fourth consecutive month to 3.8% in September 2024, the lowest since March 2021, down from 4.4% in February and below forecasts of 3.9%. This marked the third straight month of declining inflation. In response, and following the Federal Reserve’s example, the Monetary Policy Committee (MPC) executed a widely expected 25 basis point rate cut, bringing the rate down to 8.0%. This decision aligns with the prevailing view that a slightly more accommodative policy approach will help maintain lower inflation over the medium term.
The FTSE/JSE All Share Index rose by 9.6% in Q3. The SA Listed Property sector led the gains with an 18.7% rise, followed by Financials, which climbed 13.9%, while Resources saw a slight decline of 1.1%. Industrials stood out as one of the top-performing sectors, benefiting from a rally in China at the end of the month. This rally drove up Tencent’s share price, boosting Naspers and Prosus shares by approximately 14% in September, offering positive outcomes for South African investors. Additionally, China’s stimulus measures contributed to higher commodity prices, positively impacting the local resource sector.
South African bonds delivered impressive gains, with the FTSE/JSE All Bond Index rising by 10.5% (in Rand) over the quarter, further boosting the year’s overall returns. Bond yields continued their decline, following the favorable GNU election results. The Rand strengthened significantly by the end of September, reaching its highest levels since early 2023. The Rand appreciated by 6.4% against the US dollar and 1.7% against the Euro, while recording a marginal gain of 0.3% against the Pound Sterling.
Source: 2IP, I-Net Bridge, BER, RMB Global Markets, Bloomberg, Stanlib Asset Management, Schroders, Stats SA, M&G, Ninety-One