OIG Monthly Market Review
Local
During July, the South African stock market rallied in line with global markets. The FTSE/JSE Capped SWIX Index posted a notable gain of 4.1%, marking its strongest monthly performance since January.
The primary drivers were businesses focused on the domestic market. Discretionary retailers exhibited a remarkable surge of 13%, while general retailers also displayed strong momentum with a 10% increase, achieving double-digit returns for the second consecutive month. The financial sector made substantial contributions as well, banks recorded an 8% increase, while insurers outperformed with a 10% rise.
The standout in the currency arena over the past two months has unquestionably been the South African rand. The currency's recovery continued in July, rebounding from its dip towards R20/US$1 that was triggered in May following US allegations regarding weapons supply to Russia. By the end of July, the rand stood at R17.85/US$1, showcasing a 5.6% monthly strengthening against the US dollar, ranking second after the Brazilian real. However, the subsequent month saw the rand rise to the forefront, marking an impressive almost 6% gain against the US dollar.
Local government bonds experienced a second successive month of gains, following the trend of the currency. The benchmark 10-year government borrowing rate decreased to 11.5% by the end of July, after reaching 12.5% back in May.
South Africa's recent inflation figures came in below expectations for the second consecutive month. Core inflation, which stood at +5% year-on-year, eased closer to the midpoint of the South African Reserve Bank's target range of 4.5% year-on-year. The inflation data was revealed a day prior to the Reserve Bank's interest rate decision, influencing a narrow majority of the Monetary Policy Committee members, 3 out of 5, to opt against further raising the interest rate.
In recent weeks, we have seen promising changes in our energy landscape, leading to fewer instances of load shedding. These improvements can be attributed to a combination of factors: increased energy availability due to reduced planned maintenance, a drop in peak energy demand, and a notable boost in wind power generation, driven by extreme weather conditions in Cape Town. These developments have unexpectedly resulted in a better-than-expected energy scenario for June 2023. However, the sustainability of these improvements over the long term remains to be seen.
Finance Minister Enoch Godongwana and Trade and Industry Minister Ebrahim Patel engaged with US Trade Representative Katherine Tai to advocate for an extension of the African Growth and Opportunity Act (AGOA). This move comes amidst concerns raised by political analysts and opposition parties regarding South Africa's stance on Russia, which could potentially impact its US relations. Although President Putin will not be present at the August BRICS seminar in Johannesburg, concerns linger over the fate of AGOA. Meanwhile, President Ramaphosa participated in the Africa summit held in St. Petersburg.
Global
Global stock markets surged again in July, marking a second consecutive strong month, MSCI World was up 3.4%. This growth has led to a 19.4% increase Year-to-Date. The good news is that all major global stock markets showed positive results for the month.
The July upswing was widespread. Notably, the energy sector had a remarkable month, boasting a 7.4% increase. This boost managed to push the sector into positive territory year-to-date. Brent crude oil prices also rebounded, crossing the US$80 per barrel mark for the first time since April, with a robust 14% month-on-month rally. This surge in oil prices was driven by commitments from Russia and Saudi Arabia to continue supply reductions and positive expectations that China's efforts to boost economic activity would lead to higher demand.
United States
The technology-driven Nasdaq Index increased by 4.0%, making a total gain of 37.1% this year, while the S&P 500 saw a 3.1% increase, bringing its yearly gain to 19.5%. This marks the fifth consecutive month of growth for both indices. During the month, over half of the companies listed in the S&P 500 reported their second-quarter earnings for 2023. Surprisingly, the combined earnings were about 6% higher than anticipated, as the predicted economic slowdown didn't materialize as expected. The Dow Jones also joined the upward trend, rising by 3.3% in July and achieving a 7.3% gain this year.
The market was driven by the release of US inflation data for June, which came in lower than expected at +3% compared to the previous year. This marked the lowest reading in over two years and continued a trend of twelve consecutive months of decline in the inflation measure. Despite this data, the US Federal Reserve (Fed) went ahead with its anticipated move and increased interest rates by 0.25% during the July meeting. This decision elevated the US policy rate to its highest point since 2001. This decision came alongside positive changes in the economy, driven by steady job numbers and easing inflation. The US job market remains strong, with job growth continuing for 30 consecutive months as of June. The unemployment rate stayed low at 3.6%.
The US dollar displayed relative weakness against most other currencies throughout July. The US Dollar Index, which measures the dollar's performance against a basket of other currencies, experienced a 1% decline. This decline marked the second consecutive month of decrease.
United Kingdom
In the United Kingdom, the prominent FTSE-100 index concluded July with a 2.2% gain, totaling a 3.3% increase for the year. Notably, June witnessed a decrease in UK inflation, settling at 7.9% year-on-year. This figure came in below the predicted consensus of 8.2% and was significantly lower than May's unexpectedly high rate of 8.7%. Core inflation for June, which excludes the volatile categories of food and energy, remained persistent at 6.9%, slightly lower than May's 7.1%, which marked a 31-year high.
Eurozone
Germany's DAX index concluded July with a 1.9% increase, bringing the year's gain to 18.1%, while France's CAC Index saw a 1.3% rise for the month. The European Central Bank (ECB) raised rates by 0.25%, marking the ninth consecutive increase and pushing the ECB deposit rate to 3.75%.
June's euro area inflation stood at 5.5% year-on-year, a decrease from May's 6.1%. EU annual inflation for June was 6.4%, down from May's 7.1%. Germany's inflation rate for July dipped to 6.5%, compared to June's 6.8%. Notably, the euro area's GDP growth accelerated in the second quarter of 2023, expanding by 0.3% quarter-on-quarter, surpassing the 0.2% consensus forecast. Among individual countries, France and Spain exhibited relative resilience, with growth rates of 0.5% and 0.4%, respectively. Germany, on the other hand, experienced stagnant growth, while Italy faced the weakest growth, contracting by 0.3% quarter-on-quarter. In annual terms, euro area GDP growth was at 0.6%, a decrease from the 1.1% pace observed in the first quarter of 2023.
China
Chinese stocks wrapped up July on a positive note, despite disappointing economic data releases throughout the month. Encouragement stemmed from the National Development and Reform Commission (NDRC), the government's key economic planning agency, which introduced a policy document on July 31. This document outlined measures to increase consumption and expand various sectors such as automobiles, real estate, electronics, and services.
Chinese stocks, especially those listed offshore, stood out as the top performers among emerging markets during July. Notably, the Nasdaq Golden Dragon China Index, which tracks Chinese companies listed in the US, saw a remarkable 20% increase for the month. The Hang Seng China Enterprises Index, experienced a notable 10% rise for July, helping emerging market (EM) equities outshine equities from developed markets (DMs) for the month. The MSCI Emerging Markets Index showed a solid 6.3% increase.
Despite this positive market sentiment, China's factory activity encountered its fourth consecutive monthly decline in July. The official manufacturing Purchasing Managers' Index (PMI) registered at 49.3, slightly surpassing the anticipated 49.2 but falling from June's 49.0 reading. Similarly, the official non-manufacturing PMI, which gauges business sentiment in the services and construction sectors, decreased to 51.5 in July. This marked its lowest point in the year and the fourth straight monthly decline, compared to June's reading of 53.2. It's important to note that the threshold of 50 separates expansion from contraction. The National Bureau of Statistics attributed a decline in construction activity to adverse weather conditions, which impacted the sector by -4.5%.
In summary, as we pass the mid-year mark, the economy maintains its forward momentum, albeit at a slightly reduced pace. Challenges and uncertainties persist, with the pace of consumer spending growth moderating and inflation posing a challenge for policy decisions. The market outlook holds an air of uncertainty. Amidst manageable inflation and persistent growth, we are left with a divided outlook from central banks globally, though the developed world economy could experience a slowdown towards year-end. The paramount concern lies in the delicate balance between slowing growth, inflation, and geopolitical risks.
FUND PERFORMANCE REVIEW | JULY 2023
