July 2019: Markets look to monetary policy to save the day

By Gielie de Swardt, head of Retail Distribution at Sanlam Investments

Most of the financial market action during July happened on the last day of the month, with the US Federal Reserve upsetting markets when it reduced official interest rates by 25 basis points as anticipated but put paid to market expectations that this may be the beginning of an aggressive rate-cutting cycle.

Before that, developed country stock markets were notching up steady gains and thus still managed to end the month in the black, with the dollar-based MSCI World Index ahead 0.4%. US stock markets led the pack, hitting new highs during the month; UK equities achieved solid gains notwithstanding Brexit uncertainty and European stock markets eked out gains amid deteriorating economic conditions. 

In Europe, all eyes were on the new leadership appointed at key European Union institutions, including the decision to make IMF Managing Director Christine Lagarde the new President of the European Central Bank (ECB). Mario Draghi delivered his last ECB statement, laying the ground for further easing in monetary policy when Lagarde takes over the reins on November 1. This will potentially include interest rate reductions in a tiered fashion and further asset purchases.

Amid this increasingly accommodative global monetary policy environment, the value of negative yielding debt in the world topped $14bn towards the end of July.

For a change it was uncharacteristically quiet on the trade front during July. Investors adopted a wait- and-see approach after President Donald Trump and Chinese Premier Li Keqiang agreed to continue trade negotiations at the G20 meetings in June. On. August 1, however, Trump turned trade negotiations on their head when he tweeted his plans to impose 10% tariffs on $300bn worth of goods from September 1. He justified his surprise move as a response to China’s failure to follow through on promises to resume imports of US agricultural goods.

China’s economic conditions remain under pressure, with the world’s second largest economy already feeling the effects of the trade tariffs imposed on its exports to date. However, investors are confident the country will continue to provide the fiscal and monetary policy support needed to keep the economy on an even, if slower-paced, growth trajectory.

Emerging market equities trailed their developed market counterparts during July as risk appetite contracted in response to mounting geopolitical tensions with Iran and ongoing global economic concerns. The MSCI Emerging Market Index ended the month in the red (-1.7% in dollar terms) but still managed to hold onto respectable single-digit gains (7.4%) for the year to date. 

In South Africa, stocks were buffeted by a deteriorating fiscal outlook as the mounting costs of SOE rescue packages became evident. Concerns that ANC political infighting could stand in the way of the structural change vitally needed to get the economy going again also weighed on investor sentiment.

These worries saw the FTSE/JSE All Share Index (ALSI) decline by 2.4% on a total return basis during the month and government 10-year bond yields rise from about 8% to more than 8.4% as SOE investor concerns intensified in the last half of the month. For July as a whole, the FTSE/JSE All Bond Index (ALBI) retraced 0.74% but year to date it has still advanced 6.9%.  Foreigners also continued to sell off South African fixed interest and equity assets in what has become the biggest net disinvestment year-to-date since 1998.

Eskom dominated headlines and saw rating agencies take a dimmer view on the country’s fiscal, and thus economic, outlook. Treasury applied for a Special Appropriation Bill to raise twice the initially envisaged funds to bail out Eskom. Fitch and Moody’s responded negatively, with the former downgrading South Africa’s sovereign rating outlook to negative and the latter labelling Eskom as credit negative. Towards month-end, Eskom delivered financial results, reporting a R20.7bn loss – less than the expected R25bn loss expected by the markets and thus not quite as damaging.

On the JSE, the best performing sectors during July were consumer goods (3.1%), technology (2.6%) and telecommunications (2.4%), while the worst performers were the financials (-6.4%), basic materials (-5.2%) and industrials (-3.8%) sectors.

Year to date, the basic materials sector has been a top three performer. However, during July conditions deteriorated for the sector as the ongoing global and local economic slowdown adversely affected demand. Steel consumption, for instance, is at a 10-year low as a result of slow economic growth and domestic fiscal constraints.

Employment statistics brought more bad news, showing that unemployment had risen to its highest level in a decade, increasing from 27.6% in the first quarter to 29% in the second quarter. In the financial sector, Nedbank joined other companies in announcing retrenchments this year, with some 1 500 job cuts likely.

Against this gloomy domestic backdrop, the SA Reserve Bank cut the repo rate by 25 basis points, joining many other developed and emerging market central banks also loosening their monetary policy reins in the interest of anchoring inflation expectations and achieving sustainable growth.

The SA Listed Property Index (SAPY) had a negative month, declining 1.2%, and cash returned 0.6%. During July, the Rand strengthened by 0.5% against the greenback and depreciated 1.7% against the Euro. 

For the year to date, the ALSI and ALBI returned 9.6% and 6.9% respectively. Listed property returned 4.8% and cash returned 3.6%. The Rand depreciated 1.5% against the greenback and 4.0% against the Euro. 

Over the 12 months to end July 2019, the ALSI returned a paltry 2.2%, while the ALBI took the lead with a return of 8.1%. Listed property eked out 0.1% over the 12 months and cash returned 7.3%.

Over the long run (10 years to July 2019), equities were the top performing local asset class, delivering an annualised return of 12.1%. Bonds delivered 8.8% and cash 6.5%, against consumer price inflation of 5.14%. Internationally, the MSCI World Index returned 16.6% in Rand terms, boosted by the weakening of the local currency over the past decade.