It has certainly been an action-packed quarter for the markets, spanning a correction for tech stocks at the end of July and into the flash crash in early August, and then a strong recovery in August and again in September. Overall, investors have every reason to be pleased with where the three months to 30 September have ended, with the gains adding to what has already been a pleasing year of performance.
The panic in August, due to the unwinding of global carry trades in Japan, quickly gave way to renewed optimism as markets looked forward to the US Federal Reserve’s first interest rate cut of the cycle – and got more than they hoped for with a 50bps cut. The quarter ended with the S&P 500 up 5.9% (up 22.1% for the year till then) and the MSCI World up 6.5% (and up 19.3% for the year).
The S&P 500 index and Europe’s benchmark Stoxx 600 powered to new highs. Continuing a theme we have seen throughout 2024, the rally continued to broaden beyond the Magnificent Seven tech stocks to embrace industrials and other sectors, small cap stocks, and a wider geographical base. A massive stimulus announcement from China, meanwhile, helped to boost emerging markets late in September.
Ongoing geopolitical instability with conflict heating up in the Middle East did little to dampen spirits. Even the oil price has largely shrugged off the impact of the latest developments in the region, no doubt helped by Saudi Arabia’s decision to abandon its unofficial price target of $100 a barrel for crude. Oil fell by 15.2% for the quarter, although it did spike in the first week of October. Gold meanwhile gained 13.3% for the quarter to be 27.8% up for 2024, but this is a function of lower interest rates rather than geopolitical angst.
Mismatched expectations?
Looking ahead, we have a conservative outlook for potential stock market gains. One possible drag on equity prices for the rest of this year and for 2025 lies in the market’s high expectations in terms of the Fed’s pace and depth of interest rate cuts. Markets had been pricing in another 150bps in US rate cuts over 12 months, while the Fed seemed to be targeting the same level of cuts by the end of 2025.
As the most recent economic data from the US shows, the economy remains irrepressibly strong with robust consumer spending and business investment. The labour market, too, has bounced back strongly after a short dip. This reality would suggest that the Fed may keep interest rates higher for longer since there is no need right now to stimulate the economy or protect jobs. This will not necessarily favour companies with more leverage in their balance sheets.
The US election will be held within a few weeks from now – an event which may see volatility rise until the elected candidate takes office. While we believe that the Fed’s actions will have a larger longer-term impact on equities markets overall than the winner of the election, some sectors may turn out to be winners and losers depending on who occupies the White House.
We are also mindful that the risks of a disruptive Donald Trump presidency are not currently priced into the markets – nor or other geopolitical risks such as a spike in the oil price due to a full-blown war in the Middle East. Keeping all of this in mind, we see the forward pricing of global equities as relatively high. Strong earnings will be needed to justify these ratings.
SA Inc. gets a boost
South African assets, had a good quarter, buoyed by some return of appetite for risk, higher gold prices, and confidence in the market-friendly Government of National Unity (GNU). The JSE All-Share Index was up 9.6% and South African bonds gained 9%, as local buyers bought into SA Inc.
The South African rand was one of the top three emerging market performers for 2024, gaining 4.9% versus the dollar in the third quarter. However, the rand was up only 1.2% against the euro and lost 0.7% versus the British pound. Its gains against the US currency were thus clearly more about weakness in the US dollar (which fell 4.4% against its developed-market peers) than confidence in the rand.
South African assets are benefitting largely from favourable global trends but remain vulnerable to external shocks. As such, we retain our bias towards offshore investment for most of our investors. In order to reappraise this stance, we would need to see SA Inc. shares outperform on a prolonged basis as well as experience real signs that the government is committed to deep economic reforms.