Market Overview: November 2018
Global equity markets reversed some of their losses in the last week of November following renewed optimism towards risk assets. News that the US would hold off imposing further tariff increases on Chinese imports for 90 days was arguably the primary driver behind investor sentiment, coupled with the prospect of the US Federal Reserve possibly paring back further interest rate hikes. Demand for risk assets helped lift emerging market returns, however South African equities missed out on the risk-on sentiment as a string of poor economic data, a stronger local currency and rising interest rates weighed on the local bourse.
In the US, markets rallied following comments from the Federal Reserve signalling a potential slowdown in the Fed’s three-year interest-rate hiking cycle. The comments came on the back of economic data which pointed to a possible deceleration in economic growth and inflation, driving demand for longer-dated US debt. The yield on the benchmark 10-year US Treasury bond closed the month lower at 2.9%. In other news, the US concluded the signing of the much-anticipated North American Trade Agreement, while the biggest driver of equity returns for the month came from the announcement of a 90-day pause in the trade war between the US and China – giving the two countries more time to negotiate before a further round of tariffs is imposed. The S&P 500 and the Nasdaq rallied on the back of the announcement, posting their strongest weekly returns since December 2011.
In the UK, Brexit concerns continued to weigh on the market, with Prime Minister Theresa May's exit strategy in danger of being rejected by Parliament and spreading further uncertainty. Worries that a disorderly break from the EU could trigger a recession were renewed following a report from the Bank of England, which suggested that Britain’s economy would shrink by 10% if it left the EU without a deal. Also weighing on investor sentiment was a broad-based decline in corporate earnings, sparking concerns over the region’s growth outlook. In more positive news, the Italian government and the EU moved closer to reaching a consensus over Italy’s budget deficit – an issue that has weighed on European markets in recent months.
In Asia, news of the US-China ceasefire helped drive equity returns, offsetting reports of a potential contraction in China’s manufacturing output. China’s PMI fell to 50 points in November, which, although marginally below market expectations, was the lowest reading in more than two years.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 1.5% in November. Emerging markets outperformed developed markets, with the MSCI Emerging Markets Index returning 4.1% and the MSCI World Index delivering 1.1%. Among developed markets, the S&P 500 produced 2.0%, the Dow Jones Industrial 30 returned 2.1%, while the technology-heavy Nasdaq 100 posted -0.1%. In Europe, the UK’s FTSE 100 returned -1.6% and Japan’s Nikkei 225 delivered 1.5%. Among the larger emerging markets (all in US$), the strongest performers for the month were the MSCI Turkey with a return of 13.1% and MSCI India with 10.4%, while the weakest markets included Brazil’s Bovespa (-1.5%) and the MSCI Russia (-1.2%). The Bloomberg Barclays Global Aggregate Bond Index (US$) returned 0.3%, while the EPRA/NAREIT Global Property Index (US$) produced 3.5%.
Brent crude was the biggest loser among commodities, closing the month at US$57 per barrel, down 22.2% from the previous month. The decline in the oil price was largely on the back of international oversupply, waning demand and uncertainty around Russia’s commitment to support OPEC’s decision to curtail further production. OPEC and supporting countries are due to meet in mid-December to discuss tapering further international supply in a bid to prop up oil prices. Meanwhile, gold closed the month relatively flat at 0.5%, palladium rallied 11.4%, platinum lost 4.6% and copper closed 3.2% higher.
Turning to South Africa, in spite of inflation coming in at 5.1% (y/y) for October as expected, the SARB went against market expectations by increasing its benchmark lending rate by 0.25 percentage points to 6.75%, citing long-term inflationary pressure as the main catalyst behind the decision. This lent some support to the rand and bonds, demonstrating the SARB’s intent to rein in inflationary expectations around the 4.5% midpoint of its target band. Global ratings agency S&P announced that it would keep South Africa's foreign-currency and local-currency credit ratings at below investment grade due to concerns over the country’s fiscal prospects and debt burden; however, its stable outlook made the prospects of a further near-term downgrade unlikely. Eskom, meanwhile, announced nation-wide electricity outages due to a sharp decline in coal stockpiles at five of its power stations. Unsurprisingly, business confidence fell for the third straight quarter, currently sitting at 31 points for Q4 - three points shy of last quarter’s reading.
In more positive news, manufacturing output rose by 0.1% y/y while retail sales rose 0.7% y/y, both for September. An increased appetite for emerging market assets helped drive demand for government debt, with the yield on the South African 10-year government bond decreasing to 9.36% at month end. The BEASSA All Bond Index returned 3.9%, inflation-linked bonds (the Composite ILB Index) delivered -1.1%, and cash as measured by the STeFI Composite Index returned 0.6%. The rand also benefited from the global risk-on environment, gaining 6.9% against the US dollar, 6.8% against the euro and 7.1% against the pound sterling.
The FTSE/JSE All Share Index returned -3.2% in November. Resources were the worst performers with -11.5% due to rand strength and softer metal prices (particularly platinum), while Financials were flat at 0.5%. Industrials returned -0.7% and Listed Property produced -1.3% following a negative report on Nepi Rockcastle released by Viceroy Research, which resulted in a contagion effect on the index.
According to Morningstar data, the average general equity fund returned -2.2% for the month, with the average balanced fund delivering -2.1%. The average low-equity balanced fund averaged -1.0%, while multi-asset income funds returned 0.6% on average.
Sources: Prudential, M&G Investments, Bloomberg, Morningstar data to 30 November 2018.