August 2019: Fraught financial markets test the mettle of investors
A further escalation in trade tensions between the US and China set the scene for financial markets during August. Investor anxiety saw emerging markets being sold off and safe haven investments, like US Treasuries, gold and the yen, rallying.
At the start of the month, US President Donald Trump announced a surprise $300bn round of new tariffs to be implemented in two tranches in September and mid-December. China responded by introducing tariffs of $75 billion on US agricultural goods and oil. This prompted Trump to increase tariffs on existing and planned goods to 15% from 10%. Trump also made the unheralded move of ordering US companies out of China.
These measures saw US Treasuries trade down to 1.5%, more than 50 basis points off their July levels. Global negative-yielding debt burgeoned to more than $16 trillion by the end of the month and there was much speculation about whether the bond market had entered dangerous bubble territory.
In Europe, economic data painted a mixed picture, with the Eurozone Purchasing Managers’ Index (PMI) unexpectedly rising to 47.0, a two-month high, in August. Germany’s economic growth tipped into negative territory, shrinking 0.1% in the second quarter compared with the first quarter. The prospect of a no-deal Brexit in the UK weighed on the UK economy and the pound.
China’s economic conditions remained under pressure. In July, industrial production fell below 6% for the first time in 17 years. In August, China’s central bank introduced a new interest rate-setting system that will provide banks with a reference rate on new loans every two weeks. The new guidance mechanism is designed to encourage banks to reduce rates on corporate borrowing and, in so doing, provide support for the economy.
At home the JSE All Share Index ended the month more than 4% in the red, underperforming the 2% increase in the rand-denominated MSCI Emerging Markets Index. In dollars, the MSCI Emerging Index came down 4.9% during August, more than double the MSCI World Index 2% loss.
The rand depreciated during the month on the flight to safety globally. The local unit weakened to slightly above R15 to the dollar in the wake of the tariff announcements and remained in that territory thereafter. The FTSE JSE All Bond Index delivered just short of 1% during the month, slightly outpacing the 0.6% offered by cash.
Eskom remained under the spotlight during August, as concerns mounted about the state of the government’s finance and risk of becoming mired in a debt trap. Government put a restructuring proposal for the state-owned enterprise on the table and in the last week of the month Finance Minister Tito Mboweni released a broad-spanning document outlining government’s plans to reinvigorate the economy. Speculation about whether South Africa would be forced to approach the IMF for a bailout were quickly dispelled by government, the Reserve Bank and the IMF itself.
In the stock market, domestically-focused companies in the retail and banking industries took the heaviest beating, while the weaker rand limited rand-hedge stocks’ losses.
On the JSE, the best performing sectors during August were basic material (-0.18%), technology (-1.60%) and consumer goods (-2.18%), while the worst performers were the telecommunications -6.14%), consumer services (-5.51%) and industrials (-4.37%) sectors.
The SA Listed Property Index (SAPY) had a negative month, declining 3.57%, and cash returned 0.6%. During August, the Rand depreciated by 7.1% against the greenback and 5.9% against the Euro.
For the year to date, the ALSI and ALBI returned 6.9% and 7.9% respectively. Listed property returned -2.97% and cash returned 4.85%. The Rand depreciated 5.5% against the greenback and 1.68% against the Euro.
Over the 12 months to end August 2019, the ALSI declined 2.58%%, while the ALBI took the lead with a return of 11.12%. Listed property slumped 11.33% over the 12 months and cash returned 7.34%.
Over the long run (10 years to August 2019), equities were the top performing local asset class, delivering an annualised return of 11.49%. Bonds delivered 8.74% and cash 6.54%, against consumer price inflation of 5.12%. Internationally, the MSCI World Index returned 16.74% in Rand terms, boosted by the weakening of the local currency over the past decade.