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OIG Monthly Market Review

Following a robust performance in July, global equity and bond markets experienced a retreat in August, primarily due to lingering concerns surrounding global inflation. In the United States, optimistic economic data and hawkish statements from the US Federal Reserve have cast doubt on the possibility of early interest rate cuts by the Fed. The sharpest declines were observed in emerging market shares, notably impacted by disappointing Chinese economic data, which had a significant effect on Asian stock markets. Despite intensified efforts by Chinese authorities to stimulate their economy, a crisis of confidence appears to be affecting both Chinese consumers and private sector companies, contributing to these market uncertainties.


Local

In South Africa, the FTSE JSE All Share Index saw a decline of 5.1% in August, with a year-to-date performance of 2.6%. The SA Listed Property Index managed a slight gain of 0.8% for the month, though it remained down by 4.7% year-to-date. Key sectors, including resources, industrials, and financials, all experienced losses.


Among the largest JSE-listed companies by market capitalization, BHP Group saw a 1.4% decline in August. Prosus, dropped by 7.3%, while Naspers lost 8.5%, and Richemont declined by 6.7%. On a positive note, Anheuser Busch InBev, the third-largest company on the JSE, surged by 5.5% month-on-month, and British American Tobacco was up by 4.9% month-on-month.


*Source: Factset


The South African rand fell by 5.8% against the US dollar in August, marking a year-to-date decrease of 10.5%.


In economic data, South Africa's July headline Consumer Price Index (CPI) slowed for the fourth consecutive month, coming in lower than expected at 4.7% year-on-year, the lowest reading since July 2021, down from June's 5.4%. This was primarily driven by a continued decline in fuel prices, with the annual rate for fuel down by 16.8% year-on-year in July. Notably, the transport category turned negative for the first time since January 2021. Additionally, the surge in food and non-alcoholic beverage prices, which had been a significant driver of inflation in previous months, eased to 9.9% year-on-year in July, down from June's 11%. Core inflation, excluding food and energy, reached a 10-month low at 4.7% year-on-year in July, compared to 5% year-on-year in June. Retail sales data for June, released in August, showed a 0.9% year-on-year decline, marking a consistent decline in retail sales data year-to-date.


*Source: Bloomberg, Stats SA, SARB, RMB Markets


The 15th BRICS summit was held from the 22nd to the 24th of August at the Sandton Convention Centre. The recent expansion of the BRICS group, which now includes six new members (Iran, Saudi Arabia, the United Arab Emirates, Egypt, Ethiopia, and Argentina), raises concerns regarding its alignment with the United Nations' quest for global peace and human rights. There is a glimmer of opportunity amidst the challenges—expanding exports to the newly admitted members, particularly the United Arab Emirates and Saudi Arabia, holds promise. These Middle Eastern nations have a substantial demand for imported food, and South Africa, being a significant net exporter of agricultural products, stands to gain by tapping into these markets.


*Source: IMF, World Population Review, EI Statistical Review of World Energy, World Trade Organization


In July, the trade balance shifted to a positive position, showing a surplus of R16.0 billion. This improvement has boosted the year-to-date trade surplus to R19.5 billion, although it still lags significantly behind the R154.6 billion surplus recorded during the same period in 2022. The growth in July's trade surplus was primarily driven by increased exports of vehicles and transport equipment.


Global

Markets declined by almost 10% in August before recovering slightly. These tumultuous times were marked by heightened tensions after Fitch downgraded the US credit rating. These concerns were compounded by China's ongoing struggles with deflation and rising worries about energy-related inflation.


Global Equity markets faced a setback, with the MSCI World index declining by 2.3% month-on-month nonetheless year-to-date performance remained robust, showing a positive return of 16.6%.


*Source: Factset


United States (US)

Consumer Price Index (CPI) revealed a year-on-year increase of 3.2%, rebounding from a June slowdown to 3.0%. Core CPI, which excludes food and energy components, saw a 4.7% year-on-year rise, slightly down from June's 4.8%. On a monthly basis, headline inflation remained stable, increasing by 0.2%.


Retail sales in July surpassed expectations, showing a 0.7% month-on-month increase, and June's retail sales data were revised upwards to 0.3% month-on-month. On a year-on-year basis, retail sales showed growth of 3.2% in July.


In the stock market, the Nasdaq Composite Index, heavily weighted towards tech companies, experienced its poorest monthly performance in 2023, declining by 2.2% month-on-month. The S&P 500, representing a broader market segment, slipped by 1.8% for the month. The second quarter of 2023 saw the corporate results season wrapped up for the S&P 500 companies, with earnings slightly down 2.6% year-on-year.


In August, rising yields posed a significant challenge for risk assets, with the US 10-year bond yield surging to its highest level since 2007, reaching 4.35% mid-month before settling at 4.1% by month-end. Sectors sensitive to interest rates took a hit, resulting in the worst-performing segments for the month, specifically, real estate, consumer staples, and utility sectors of the S&P 500 Index recorded declines of 3.0%, 3.6%, and 6.2% month-on-month, respectively.


Global yields saw an uptick due to two primary factors: robust US economic performance surpassing expectations and a continuous message from Federal Reserve (Fed) members, emphasizing the potential for further interest rate hikes and acknowledging inflationary concerns. As yields rose, the US dollar strengthened against major currencies, with one notable exception being the Turkish lira, which saw a 1% month-on-month increase but remained down by 30% year-to-date.


Ratings agency, Fitch, recently downgraded the United States' credit rating from AAA to AA+. They highlighted a deteriorating fiscal outlook, projecting a deficit increase to 6.9% by 2025. Moreover, they anticipate that the debt-to-GDP ratio will reach 118.4% in 2025, which is 2.5 times higher than the median debt-to-GDP ratio of 39.3% typically associated with AAA-rated countries.


Eurozone

August saw Germany's DAX index close 3.0% lower and France's CAC Index ended the month 2.4% in the negative, with a year-to-date gain of 13.0%. In economic news, inflation held steady at 5.3% in August, while core inflation, which excludes food and fuel, eased slightly to 5.3% from 5.5% in July.


Emerging Markets

Emerging market (EM) stocks, as measured by MSCI EM, faced even greater challenges than their counterparts in developed markets (DMs), with a significant decline of 6.1% month-on-month. Chinese companies played a substantial role in this downturn, especially those listed offshore.


China

China's economic data continued to disappoint, with weaker-than-expected growth in July retail sales reported in August. Industrial production also saw less growth than anticipated, and manufacturing activity declined for the sixth consecutive month in August. These indicators reflected a challenging economic landscape. Investor anxiety escalated due to a real estate crisis, highlighted by Evergrande's filing for US bankruptcy protection. Additionally, heavily indebted property development group Country Garden Holdings saw its shares reach a record low and was removed from Hong Kong's Hang Seng Index. This situation is particularly concerning as many global companies rely on China for revenue, making a slowdown in the Chinese economy a significant concern for world markets.


Conclusion

Our global economic outlook for 2023 remains cautious due to factors like elevated interest rates, depleted savings, and geopolitical tensions. In the US, the economy has shown unexpected resilience in the face of high inflation and rising borrowing costs in the first half of the year. However, the cumulative effects of monetary tightening are expected to slow economic activity ahead. Similarly, the Eurozone experienced a stronger start but is likely to see a slowdown as monetary policies tighten. Inflation remains a central concern, with expectations of continued elevated levels.


FUND PERFORMANCE REVIEW | AUGUST 2023







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