Global markets were volatile for much of September – and the last week of the month in particular. The instability was enough to erase the strong gains made in the first two months of the quarter (Q3), leaving global equities flat to slightly down for the three-month period.
It is important to place this disappointing quarter-end into context. The MSCI World Index has delivered growth of 13.4% for the year to date, whilst the S&P 500 and Nasdaq have also experience returns of 15.9% and 12.1%, respectively over this nine-month period.
Other than Covid-related fallouts such as lockdowns and supply bottlenecks, the dominant themes that played out over the past three months are the same as have been prevalent during the year to date. Markets are still watching the US Fed for signs that it will reduce bond purchases later this year and follow through with the interest rate hikes by the end of 2023. We can therefore expect to see financial markets continue to move in response to the Fed’s murmurings for the remainder of the year.
Another familiar theme for readers of this newsletter is regulatory action in China, which was ramped up in the quarter. The authorities tightened the screws on big tech, especially in sectors such as education, ride-hailing and online gaming. The crackdown raises continued concerns about the safety of foreign capital in the world’s second biggest economy. The Ninety One podcast we have included with this newsletter provides further insight into this matter.
A different development in China saw the chickens from the country’s overheated housing market come home to roost, as new regulatory pressure severely impacted this sector. Debt woes at Chinese property developer, Evergrande, threw markets into disarray in September, amid fears that it would default on interest payments. Consensus is that this should not pose a systemic risk to the global economy, but contagion risks, such as construction sector commodity prices persist, nonetheless.
Local markets feel pressure
On the local front, markets also came under pressure, with the JSE ALSI falling 3.1% in September and 0.8% for the quarter. However, the index is still up 12.3% for the year to date. One reason for the quarter’s ALSI slump is Naspers, the biggest counter on the JSE. It fell 21% over this period and has retraced 17.5% year-to-date, thanks to its exposure to the Chinese big tech sector via its Tencent holding. Resource stocks were also responsible for the pressure on the ALSI as commodity prices gave up some of their earlier 2021 gains on the waning of the propensity for risk.
As a result of the global risk-off trade, the rand weakened by 3.9% in September and 5.7% for the quarter against a strengthening US dollar. The currency has surrendered 12.2% of its gains since early June when it was trading at R13.40 to the dollar. Despite the recent weakness, we continue to believe that insufficient South Africa-specific risk is priced into the exchange rate, especially relative to other emerging markets, a view which has been informed by our quantitative currency model.
Notwithstanding the recent pressure on risk assets, we continue to prefer equities to cash, bonds or property in a low interest rate environment. However, we do not anticipate exceptional returns from equity markets over the coming year or two. As such, we are maintaining our focus on quality companies that deliver solid medium-term returns regardless of market conditions and have the ability to outperform in downward markets.
On the positive side, we believe markets have a better handle on known risks such as how vaccinations will shape the fallouts and structural shifts post the pandemic, including the ongoing impact of Covid on supply chains (and the knock-on effect for inflation), the tapering down of government relief programmes, and the rate at which central banks worldwide will hike interest rates.
In line with recent communications, our strong offshore bias is retained as we hold a position of conviction that superior growth opportunities are on offer abroad. We believe the rand remains vulnerable to external shocks as well as internal political developments. Furthermore, weaker commodities prices and a rising oil price are likely to be negative for the JSE. (For an analysis as on why we favour offshore markets over local, read our article that contrasts the performance of even our rand hedge shares on the JSE with their offshore counterparts.)
On the political front, we do not expect outcomes of the local elections or the new finance minister’s Medium Term Budget Policy Statement in November to change our thesis expressed in the paragraph above, although there might be some upside surprises in fiscal revenue as a result of resource company tax windfalls. Our article on the SA’s current status expands on these views.