Domestic

The local market started the month on the back foot, not only hampered by a sharply depreciating currency, but also by the news that the economy entered a technical recession during the second quarter of this year when GDP growth contracted by 0.7%. This followed on revisions to first quarter growth which showed that the economy contracted by an even larger 2.6% during that period. The second quarter weakness was largely ascribed to the negative contribution from the agricultural and transport sectors. By month-end, President
Ramaphosa announced a R400-billion stimulus package and a re-prioritisation of the existing budget framework to stimulate economic growth and job creation.

The FTSE/JSE All Share Index had a tough month and declined by -4.2%. It was dragged down by the Industrial sector which ended the month -8.1% lower. Within this sector, pharmaceutical and healthcare companies were particularly badly hit as concerns over their earnings grew. Financial shares lost -2.0% whereas Resources shares bucked the trend and closed 0.3% higher. The long-awaited Mining Charter was finally published at month-end and should pave the way towards more regulatory certainty for the sector.

After touching its weakest level in more than two years, the rand appreciated by 3.7% against the dollar to close the month at R14.15. Support came from the changing tide in investor sentiment towards emerging markets, the credibility of the local Reserve Bank as well data which showed that South Africa’s current account deficit improved from 4.6% in the previous quarter to 3.3% during the second quarter of the year. The Reserve Bank kept interest rates unchanged at their meeting during the month, but the tone in its accompanying statement was
decidedly more hawkish. The Reserve Bank was provided with some reprieve as consumer price inflation moderated to 4.9% in August from 5.1% the previous month. The All Bond Index clawed its way back to end the month in positive territory with a 0.3% gain.

International

The MSCI All-Country World Index closed 0.3% higher for the month, but there was a big dispersion in underlying returns. US stock ended in the green, but the tech-heavy Nasdaq was negative whereas the mostly industrial focused Dow Jones was positive. The Japanese Nikkei 225 Index rallied by 5.5% to a 27-year high, but in contrast, European markets ended sharply negative. The German DAX was down 2%. Both the euro and European shares were hit at month-end by the news that Italy’s fiscal deficit target will be larger than expected. The MSCI Emerging Market Index recovered some ground and closed the month -0.8% lower. It followed moves by emerging market central banks to shore up confidence by hiking local interest rates.

Global developed market bond yields rose, and the Barclays Global Aggregate Bond Index closed the month -0.9% lower. The US 10-year government bond yield rose above the 3% level at a time when the US Fed remained committed to hiking interest rates into next year. The Fed hiked rates by 0.25% at their September meeting and indicated that, at least, another four hikes are possible before the end of next year. The price of oil spiked by nearly 7% as Brent crude rose above the $80 a barrel level due to supply concern as the US
sanctions hit Iranian exports.

Domestic

As widely anticipated, the South African Reserve Bank (SARB) decreased the repo rate to 6.5%. SARB Governor, Lesetja Kganyago, explained that inflation forecasts had remained largely unchanged, with the stronger rand likely to mitigate the temporary inflationary effect of the VAT increase. The SARB’s internal forecast model pointed towards a more moderate path of interest rate hikes, with one hike of 25 basis points by the end of 2019. This is compared to two to three hikes at the time of the January meeting this year. The SARB communicated that the decision to relax policy by 25 basis points does not signal the start of a cutting cycle, with the Monetary Policy Committee (MPC) reiterating that they would prefer to see inflation expectations anchored closer to the 4.5% median of the target band.

For the month, the JSE ALSI returned -4.1%, eroding the total returns for the 12-month period from February’s 17.4% to 9.6%. The stronger rand was reflected in the weak performance of the big rand hedge counters with the Industrial 25 Index declining by -5.6%. Both the Resources 20 and the Financial 15 Index also dragged the bourse lower, returning -1.2% and -3.6% respectively. The S.A. Listed Property Index was down -0.9%. Foreigners maintained their net buyer position of local bonds with the All Bond Index up 2%. Cash was up 0.6% for the month.

International

Amongst global central banks, the U.S. Fed lived up to expectations and increased rates by 25 basis points. The central bank signalled that it is likely to raise interest rate three times in 2018 as opposed to four hikes (as some of the currency bulls had hoped for). This saw the U.S. dollar lose ground against major currencies. The Bank of England left rates unchanged at 0.5% but noted that the tightening of monetary policy over the forecast period would be appropriate as inflation is projected to be above the 2% target in 2019 and 2020. Earlier in the month European Central Bank President, Mario Draghi, announced that the central bank would keep interest rates unchanged. Draghi, however, announced that stimulus in the region could soon come to an end.

The latest U.S. jobs report showed that the U.S. economy added an impressive 313 000 jobs in the month of February (making this the biggest increase since 2016), however, wage inflation fell short of expectations.

Easing inflationary pressures weighed on both the greenback and global bond yields. This was reflected in the performance of global bonds as the Barclays Global Bond Index returned 1% for the month. Global equities saw another month of losses with the MSCI World Index down -2.1% while the MSCI Emerging Market Index weakened by -1.8%. On Wall Street, the S&P 500 and the tech-heavy Nasdaq gave up -2.6% and -2.7% respectively. In Europe, the FTSE 100 was down -2%. On the commodities front, Brent Crude reversed last month’s losses as the oil price rallied 7.3%. Gold’s safe-haven appeal resulted in the yellow metal gaining 0.5% for the month, while platinum was -5% weaker.