September was a risk on-month globally. This was supported by the US Federal Reserve cutting rates by 25 basis points and the European Central Bank (ECB) reducing rates further into negative territory to -0.5% from -0.4%. The ECB added additional stimulus into the European economy by implementing indefinite quantitative easing. From November it will buy €20 billion worth of bonds on a monthly basis. Although the Fed did cut rates, there remained divergent views as to the appropriate policy path. On the back of monetary policy easing the MSCI World Index delivered 1.94% (in US Dollars) and the MSCI Emerging Markets (EM) Index delivered 1.55% (in Dollars). Due to lower global bond yields, the search for yield continued, with emerging market bonds as measured by the JPMorgan EM Bond Index delivering 0.18% (in Dollars), while developed market bonds lost 1.30% (in Dollars). Global property continues to benefit from the low global interest rates, delivering 2.46% (in Dollars).
Locally, the South African economy managed to escape a technical recession after GDP grew at 3.1%. This was driven by growth in the primary sector and mining, which increased 9.7% and 14.4% respectively. Although GDP was positive, the headwinds facing the South African economy were confirmed when the RMB/BER Business Confidence Index fell to a 20-year low. The South African Chamber of Commerce and Industry declined to 89.1 – the lowest since April 1985. On the back of this, South African equities had a muted month, delivering 0.19% (in Rands). The Top 40 was flat, while small caps delivered a stellar 2.21% (in Rands). Local bonds delivered 0.51% (in Rands), underperforming cash slightly, which delivered 0.57% (in Rands). Local property delivered 0.3% (in Rands) and inflation-linked bonds delivered 0.39% (in Rands).

The World Bank reduced its growth forecasts in June due to the trade conflict between the US and China, given that between them the two countries account for more than a third of global economic activity. Global growth is now forecast at just 2.6% for 2019 from 2.9% previously forecast. Global trade is slowing, and countries directly exposed to the trade war are showing a marked deceleration. While a handshake deal between the US and China took some heat out of the trade war, existing tariffs look set to stay in place. The Fed has turned sharply dovish as a result of sluggishly low inflation, threats to the growth outlook due to weaker global trade and geopolitical tensions from the trade war. The US bond market continues to price in aggressive interest rate cuts over the next 18 months and was composed by the Fed’s decision not to cut in June. Locally, South Africa’s GDP posted its biggest quarterly contraction since 2009 in the first quarter of this year, printing a -3.2% quarter-on-quarter versus 1.4% growth in the previous quarter. The rand relative to the dollar appreciated some 3.24% in June as risk sentiment improved amid expectations of looser monetary policy in the US and the Eurozone.

The local equity market followed global markets higher, and the MSCI World index delivered some 3.25%. Furthermore, the MSCI EM index marginally underperformed its developed market counterpart, delivering some 2.94%. Underscoring yields moving lower in the month is a sense of cautiousness following the dovish pivot by a number of central banks in recent times. As such, the JP Morgan Global Aggregate index lagged risk assets and delivered -1.16% as the currency strengthened. Given the riskon month, emerging market bonds fared better than their developed market counterparts, delivering some 0.80%. The local equity market followed global markets higher, and the ALSI delivered 4.78%. The strong rally in the local market was largely driven by the Resi-20 index delivering some 10.28%. The ALBI lagged its risky counterparts and delivered 2.27%, with the 7-12 year area of the yield curve rallying some 2.70%. Furthermore, inflation-linked bonds underperformed their fixed coupon counterparts, delivering 0.13%. Given the risk-on environment the local property market delivered some 2.20%. Local cash delivered 0.59% for the month of June.

The levels reached by global equities in their wider rally for 2019 remains dependent on signs of a resolution in the trade war. However, concern about the darkening outlook for global growth has drawn investors back into government bond markets in March. A weaker outlook for the global economic growth in the first quarter of 2019 was reflected in the decline in sovereign bond yields as a dovish Fed and ECB led to a repricing of interest rate outlooks. Furthermore, risks to growth remain and the US yield curve (measured by the difference between the 10-year and 3-month Treasury yields) inverted, thereby flashing a recession signal for the first time since 2007. The Fed signalled no rate rises this year, bringing its projections more in line with market expectations. The ECB’s actions were more dovish than expected, with a fresh round of cheap lending for Eurozone banks due to start in September. The highly uncertain outcome of Brexit and a slowdown in global growth will continue to create a challenging mix for the ECB. South Africa made it through another scheduled Moody’s review to retain its local currency investment-grade rating with a stable outlook. Moody’s delayed South Africa’s ratings review with SA national elections on 8 May 2019.

With signs of a deepening global economic slowdown and negative headlines, emerging market currencies came under pressure in March. As such, the rand depreciated some 2.50% relative to the dollar. Markets largely shrugged off concerns around trade disputes and geopolitical uncertainty. The MSCI World index delivered some 3.92% in rands. Emerging markets underperformed their developed counterparts. The MSCI Emerging Markets index delivered some 3.42% in rands. The flight from risk kept investors piling into government bonds, pushing yields lower. The JP Morgan Global Aggregate returned some 4.16% in rands. Emerging market bonds lagged their developed market counterparts, delivering some 3.70% in rands. The outlook for developed market REITs and commercial real estate remains favourable, despite some mixed macroeconomic news this year and potential headwinds for distribution growth. As such, developed market property delivered some 6.32% in rands.

The local equity market followed global equity markets higher and rallied some 1.56% in rands. The positive outcome was driven by Resources and Industrials both rallying some 4.61% and 3.49% respectively. Financials struggled in March, declining some 4.78%. Local longer dated bond yields were largely unchanged over the month. The SA 10-year government bond yield rallied some 13 basis points in the month. As such, the All Bond index delivered some 1.33% in rands. Inflation-linked bonds underperformed their fixed coupon counterparts, delivering some -0.85% in rands. The listed property sector continues to struggle having given the weakest dividend forecasts in more than a decade as they struggle to grow rentals and fill vacancies amid weak business and consumer confidence. As such, the SAPY declined some 1.46% in rands.

As we move into the final quarter of the year, it seems evident that the US market needs to cool, or the rest of the world needs to do some catching up. Though global growth is still relatively resilient, inflation risk is clearly on the rise, driven by higher commodity prices and tight labour markets. The most recent global manufacturing PMIs are consistent with a healthy underlying growth rate, but leading indicators of economic activity suggest that global growth has peaked, and with it earnings growth. Despite this positive backdrop, investors continued fretting about emerging market assets, as the recent currency crises in Turkey and Argentina fuelled worries about contagion. Locally, President Ramaphosa announced a stimulus package, which is intended to revitalise the economy. Also, the SA Reserve Bank decided to keep the repurchase rate unchanged at 6.5%, amidst the local economy unexpectedly contracting for a second consecutive quarter in Q2, largely because of a sharp drop in agricultural output.

As the rand strengthened some 3.53% in September, the MSCI World index returned -2.87% in rands. The MSCI EM index underperformed its develop market counterparts and delivered some -3.93% in rands, largely driven by weaker Asian markets. As developed market bond yields rose, the JP Morgan Global Aggregate delivered some -4.20% in rands. Emerging market bonds fared better, outperforming their developed market counterparts, delivering some -0.72% in rands. The recent dislocations should lead to value entry points opening up in some quality and value parts of equity markets. But, as monetary policy tightens in developed markets, the ability of emerging markets to fend off inflationary pressures is being tested. Furthermore, the global listed property market derated, and delivered some -5.37% in rands.

The ALSI underperformed its developed and emerging market peers in September largely driven by the stronger rand, and delivered some -4.17% in rands. The Indi-25 and Fin-15 indices delivered some -8.07% and -1.96% respectively in rands, while the Resi-20 index inched 0.34% higher in rands. The SA 10-year bond yield weakened during the course of the month. However, as US bond yields rose, the differential between emerging market bond yields and the US bond yield narrowed generally as the broader emerging markets experienced a relief rally. As such, the ALBI delivered a muted 0.30% in rands. Over the month inflation-linked bond yields were largely unchanged and the asset class is now offering an attractive inflation plus 3% virtually across the yield curve. Inflation-linked bonds outperformed their sovereign counterparts, and delivered some 0.43% in rands. The SAPY delivered some -2.60% in rands as the dividend yield pushed higher. Domestic cash returned 0.57% in rands for the month.