Q2 Market Commentary

Overview

• Stubborn US inflation clouds the global economy.
• Markets still anticipate the US Fed to cut interest rates this year.
• The global rate cut cycle has commenced – led by Canada and the ECB.
• AI mania continues to drive global equity markets higher.
• The local equity and bond markets surge, benefitting from improved investor sentiment following the election outcome.

Global markets

The US Federal Reserve (Fed) and global investment community thought 2024 would be a year of many rate cuts, but with inflation proving much stickier than most predicted, those expectations are unfortunately something of the past. Traders have already pared back their expectations and now see perhaps one or maybe two rate cuts happening this year. That is a big letdown from the six they anticipated at the start of the year. Apart from pushing out the first rate cut, the Fed also sees the easing cycle bottoming out at a higher level than previously expected, underscoring the era of higher rates for longer.

The Fed’s move to signal fewer interest rate cuts this year deepens its divergence from peers who have already started to ease. The Bank of Canada lowered its benchmark overnight rate by 25 basis, followed soon by the European Central Bank (ECB) and central banks of Switzerland and Sweden.

Q2 returns ($)

• MSCI AC World Index: 2.9%
• S&P 500 Index: 4.3%
• NASDAQ Composite: 8.5%

The MSCI AC World Index gained 2.9% in Q2 and is now up 11.3% year-to-date, led by a strong US market. The S&P 500 Index is up another 15.3% YTD, driven by a handful of mega cap tech stocks, led by Nvidia which gained 37% in Q2.

The ‘magnificent seven’ has been responsible for approximately 60% of the S&P 500 total return this year, according to S&P Dow Jones Indices. Across the globe, equity markets in China (the second largest economy in the world) continues to lag its global peers. Investor confidence remains fragile due to increased regulatory oversight, entrenched deflation, geopolitical tensions, as well as the real estate downturn.

In Europe, France has brought political risk back to European markets. The outcome of the European parliamentary election caused President Macron to announce a snap election. Market concerns about the possible outcome introduced significant volatility. The French equity market fell -6.4% in June and hampered broader European returns. Disaster is unlikely, but is giving global investors a reason – for the time being – to avoid buying broad baskets of European equities.

On the contrary, despite a rollercoaster quarter for the Japanese Nikkei 225 Index (down almost 2%), the equity market has been on a roll. Year to date the market is up 19% - improved corporate governance and the resulting improvement in corporate earnings are just some of the factors that led to improved investor confidence, driving foreign investors to increase their holdings in Japanese equities.

In the bond markets, the yield on the US 10-year government bond weakened to 4.4% over the quarter due to ‘higher-for-longer’ interest rates and surprise strength in the US labour market. The Bloomberg Barclays Global Aggregate Index fell 1.1% for the quarter and is down 3.2% this year.

South Africa

The economy recorded a small contraction in the first quarter of 2024, hurt by a slump in the mining and construction sectors. On a year-on-year basis the economy grew only 0.5%. Local inflation was unchanged at 5.2% in May. Accordingly, and as expected, the SA Reserve Bank kept interest rates unchanged at 8.25%.

Q2 returns (ZAR)

• All Share Index: 8.2%
• All Bond Index: 7.5%
• All Property Index: 5.7%
• Money Market: 2%

The JSE All Share Index had a slow start to the year but rallied 8.2% in Q2 as SA Inc shares spiked on optimism around the establishment of SA’s government of national unity (GNU), after the ANC lost its parliamentary majority for the first time in 30 years. The gains were driven by a very strong showing from the financial sector (+15.9%), and to a lessor extent from industrials (+4.8%) and resources (+3.6%).

The local mining industry has been overshadowed by the potential takeover of Anglo American by BHP – the biggest mining deal in history – after BHP made a non-binding conditional all-share offer to take over Anglo American PLC. Anglo American rejected the takeover offer and BHP never made a firm offer. Anglo American’s share price increased 23.9% in Q2.

The JSE All Property Index finished the quarter up 5.7%, benefitting from improved investor sentiment following the election outcome. SA bonds also gained from the change in sentiment towards domestic assets. On the back of this, the All Bond Index gained 7.5%. Money market assets, as measured by the STeFI Composite Index, delivered a respectable 2.1% for the quarter.

Annualised returns (%) – period ended June 2024