Market Commentary Q3 2024

Overview

• US kicked off easing cycle, cutting rates by 50 basis points.
• China announced massive stimulus package.
• Chinese stock market sees biggest rally in a decade.
• Local equities and bonds delivered strong returns

Global markets

The main events impacting markets in Q3 were (1) the US Fed initiating a new easing cycle; and (2) a new stimulus package announced by the Chinese authorities.

The US Fed cut its main interest rate by 50bps for the first time in more than four years, with more likely to come. The cut ended a long run where interest rates were kept at a two-decade high in the hope of slowing the US economy enough to stamp out high inflation. The final test will be whether the Fed can cut rates back to normal levels, while stabilising the economy.

The commencement by the US Fed of cutting interest rates bodes well for risk assets. The S&P 500 Index gained 5.9% in Q3 and is up 22% YTD. With this came a rotation into value stocks at the expense of growth stocks during the quarter. After a very strong first half of the year, most of the US mega-cap tech stocks lost ground from the end of June, despite fundamentals remaining relatively robust. US small-cap equities outperformed over the past three months on increasing expectations of the US economy achieving a soft landing and lower interest rates.

Q3 returns ($)

• MSCI AC World Index: 6.6%
• S&P 500 Index: 5.9%
• NASDAQ Composite: 2.8%

In China, the People’s Bank of China unleashed one of the country’s most daring policy campaigns in decades to pull their economy out of deflation, bolster the property market and achieve the government’s 5% GDP growth target. The stimulus measures included interest-rate cuts, freeing-up of cash for banks and liquidity support for shares. Four major cities also eased home-buying curbs, and the central bank moved to lower mortgage rates. The equity market rallied strongly on the back of the stimulus announced – the MSCI China Index soared 23.6% in Q3 and is up 29.6% for the year-to-date.

Both Europe and the United Kingdom are experiencing economic recoveries after near-recession conditions in 2023. Although Europe's growth is being fuelled by stronger bank lending and rising incomes, Germany remains a weak link due to challenges in its industrial sector and reliance on China. The UK economy is showing signs of life after a period of stagnation, with rising consumer and business confidence and a decline in inflation.

The Bank of Japan (BoJ) kept interest rates steady at its last meeting, signalling that it was in no rush to raise borrowing costs further. This after the central bank raised the cost of borrowing for only the second time in 17 years in July, in an attempt to normalise monetary policy in the world's fourth largest economy. The Nikkei 225 Index lost 4% in Q3 after the market dropped 4.8% on the last day of September. The new prime minister Shigeru Ishiba, who has been critical of the BoJ’s easy policies in the past, favoured normalising interest rates.

Overall, the MSCI World Index gained 6.6% in Q3 and the MSCI Emerging Market Index surged 8.8%. Bond investors also enjoyed a rally, as the Fed’s rate cuts finally began. The yield on the benchmark 10-year US Treasury Note, which falls when prices rise, dropped to 3.7% from 4.3% at the end of June, to snap a two-quarter streak of rising yields. Overall, the Bloomberg Barclays Global Aggregate Index gained 7% in Q3.

South Africa

The South African Reserve Bank (SARB) decided to cut the Repo rate by 25bps to 8% at its last meeting. Prior to the decision, the Repo rate had been unchanged at 8.25% since May 2023. The market expects the SARB to cut rates by a further 25bps in November 2024. However, more rate cuts are certainly on the way. The inflation outlook has improved, and the SARB’s official forecast suggests inflation will be below the 4.5% target over the next two years, together with a moderate improvement in growth.

Q3 returns (ZAR)

• All Share Index: 9.6%
• All Bond Index: 10.5%
• All Property Index: 19.1.7%
• Money Market: 2.1%

The rand improved against other major currencies, ending the quarter at R17.26 to the US dollar.

The local equity market has benefitted from increasing positivity following the start of the interest rate cutting cycle and optimism around SA’s new Government of National Unity (GNU). The JSE All Share Index surged by almost 10% in Q3, led by financials (+14%) and industrials (+11%), where China-exposed tech investors Naspers and Prosus have led the advance. Resources were marginally negative, losing 1%, despite a late surge at quarter end as authorities in Beijing took steps to stimulate the economy. A strong Chinese economy will boost demand for commodities, which will help South Africa’s mining exports.

The listed property sector also rallied and is up 30% from a total return perspective for the year to date – September 2024. It is the top-performing asset class on the JSE, having been boosted by the latest interest rate cut and no load shedding by Eskom for six straight months.

SA bonds continued to perform well in Q3, driven by the GNU frenzy that started in June, a lower inflation print in August and most recently, interest rate cuts. Bond yields across the curve fell 130bps in Q3 as investors remained optimistic about the fiscal outlook post the formation of the new coalition government. The All Bond Index returned 10.5% for the quarter, fuelled by the rally in the 12-plus area of the curve, which gained 14.2%. Over the past year, it is up an impressive 26.1%.

Annualised returns (%) – period ended September 2024