Monthly Market Commentary – July 2024

In July, markets delivered mixed results across different asset classes. Global bonds performed well as yields fell, driven by softer-than-expected economic data from the US, including a decline in the Consumer Price Index (CPI), which measures inflation. These lower-than-expected inflation figures led investors to anticipate that the US Federal Reserve might cut interest rates sooner than expected. Equities showed regional variation in performance: UK stocks surged, bolstered by the positive market response to the Labour party’s general election victory, while US stocks dipped slightly due to disappointing earnings from large tech companies. However, smaller US companies fared better, buoyed by the expectation of rate cuts. Meanwhile, real assets, such as property and infrastructure, demonstrated strong returns as they are viewed as more stable investments that benefit from lower interest rates, which reduce borrowing costs and increase asset values.

The local stock market locked in another strong month of gains as upward momentum, following the outcome of the recent election, continued to support flows from local and offshore participants. SA bonds followed the same trend, continuing a strong rally as foreigners bought R19.7bn worth of SA debt instruments in July. The Monetary Policy Committee (MPC) decided to hold the repo rate unchanged at 8.25% at its July meeting. The decision was not unanimous, however, and two of the six members voted for a cut of 25bps, indicating that the start of a rate cutting cycle may be sooner than previously expected. Market expectations are for a 25bp cut in September as inflation slowly ticks towards the central bank’s midpoint target.

LOCAL DRIVERS
SARB’s Dovish Tone

The SARB left rates unchanged in the month and remained relatively cautious in their communication, stating that any future decisions would be data – dependent. Perhaps it was the acknowledgement that two members of the MPC had opted for a rate cut that tilted the scales because there was a steady slide in the ZAR that began shortly after the MPC announcement. However, most central banks are talking about easing monetary policy, and some EM’s in LATAM have already started cutting.

SARB’s Leading Indicator

The SARB’s leading business cycle indicator fell to 111.9 points in May from 113.0 points in April. On a year-to-year basis, the leading indicator increased by +2.0 % y/y in May compared to +1.8% y/y in April. The largest positive contributor was the increase in South Africa’s ‘US dollar-denominated export commodity price index’ as well as the improvement in the ‘RMB/BER Business Confidence Index’. The SARB’s leading indicator is valuable for estimating shifts in South Africa’s economic cycles. The high level of election uncertainty likely contributed to the drop in the leading indicator in May, suggesting we should see an improvement in the index going forward following the formation of the GNU.

IMF Growth Forecast

The IMF reaffirmed their growth forecast for SA of 0.9% for 2024, and 1.2% for 2025. The assumptions they have used for these forecasts have not changed and will only be tweaked once the IMF sees whether the GNU can implement the reforms it has targeted. It will, of course, take time for the new government to be able to pick the low-hanging fruit and extract more dynamism from the economy. These things are not achieved through one decision or a flick of a switch. Policies are implemented, and the effects manifest over time.

ASSET CLASS TOTAL RETURNS – ZAR
GLOBAL DRIVERS
US Presidential Debate

US President Joe Biden took the unprecedented step of withdrawing from the presidential race, marking the first time in over 50 years that
a sitting president has not sought re-election. Biden’s decision to exit the 2024 race and endorse Vice President Kamala Harris just 106 days
before the vote has been met with relief by Democratic insiders and a new sense of optimism around Harris’s chances of beating Donald
Trump.

UK Election

Keir Starmer’s Labour Party won a large majority in the UK parliamentary election, ending 14 years of Conservative rule. Labour’s victory reflects widespread public discontent with the Conservatives over issues like the cost of living crisis and failing public services. Notably, turnout for the election dropped to a 100-year low, pointing to a rejection of the traditional duopoly in British politics. The market doesn’t seem too worried about a political change, with Labour’s spending plans fiscally-neutral.

BoJ Rate Hike

The big central bank story this month was the decision by the BoJ to raise interest rates to 0.25%, and projected inflation would remain around the 2.0% target. It furthermore indicated that it would seek to steadily unwind its massive monetary stimulus. The move leaves plenty of scope for yen volatility ahead, which will affect higher-risk currencies that have benefitted from carry trades.

ASSET CLASS TOTAL RETURNS – USD

All information provided courtesy of Portfolio Metrix – adapted and published with permission. No copyright infringement intended.

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