Global Market Overview
Global financial markets posted a mixed performance in July. Corporate earnings figures for the second quarter gave a boost to the US stock market in the beginning of the month while central banks failed to go all the way in meeting the high expectations already set by the markets for the second half of the month. The ECB agreed to a raft of additional stimulus measures for September, although Draghi himself was coy on the scope and detail of this monetary easing. On the table are an interest rate cut and further bond-buying programmes, which could potentially also include corporates. Christine Lagarde has thus already received some “forward guidance” that she will probably have to stick to initially when she takes over at the ECB’s helm in November. The economic outlook for the eurozone worsened further in July, with the German purchasing managers’ index for the manufacturing industry slumping to 43 points.
The economic data on the other side of the Atlantic appears much more robust: the US economy grew 2.1% in the second quarter, significantly exceeding expectations, while the labour market continues to shrug off any uncertainty. A weaker global backdrop however led the US Federal Reserve to reduce its key interest rate by 25 basis points. However, Jerome Powell made it clear that this move does not signal the start of a cycle of fiscal loosening, prompting a wave of sell-offs on the financial markets. Although another meeting was held between US and Chinese representatives to discuss the trade dispute, it was adjourned early. Donald Trump immediately slapped new tariffs on USD 300 billion worth of Chinese imports, ratcheting the conflict up to a whole new level.
Tensions in the Strait of Hormuz have not sparked any lasting jitters amongst investors. Iran’s actions are most likely to be a desperate message to Europe, which is also imposing sanctions on the country under pressure from the US.
The value of negative yielding bonds surged to a record high of $13 trillion in July. Investors who hold these bonds are guaranteed of losing money. Why would anyone hold these bonds ? the simple answer is Japanese and European investors don’t have a choice . Growth in these regions is so slow that central banks have pushed rates below zero. These drastic measures have however not had the desired impact with both jurisdictions still suffering from low growth.
Corporate bonds had another positive month, across both investment grade (IG) and high yield (HY), outperforming government bonds. The difference, or spread, between corporate over government yields narrowed. In IG, the euro and sterling markets performed particularly well, helped by the downward moves in rates.
In the commodities markets, the S&P GSCI Spot index was down in July, with US dollar strength a headwind. Soft commodities were weak, most notably wheat and corn prices. Industrial metals recorded a small gain, supported by a rally in nickel and steel prices. The energy component of the index posted a marginally positive return, underpinned by a rally in natural gas prices. Brent crude was slightly lower. Precious metals posted a solid gain, amid a 6.2% rally in gold spot prices.
SA Market Overview
South Africa (SA) got a much anticipated 0.25% interest rate cut in July as the SA Reserve Bank (SARB) cut rates for the first time since March 2018. This was largely overshadowed by Eskom, as Finance Minister Tito Mboweni told parliament that the state-owned enterprise (SOE) would be given a R59bn bailout (in addition to the R69bn bailout granted five months ago). The ratings agencies were unimpressed, with Fitch downgrading SA’s sovereign rating outlook to negative, while Moody’s didn’t change its rating but released a report saying it was concerned that the state power utility would require even more capital from government.
The FTSE/JSE Capped SWIX Index was down 3.1% for the month, despite a strong performance from index heavyweight Naspers (+2.6%). With local sentiment weighed down by Eskom, banks and insurers were down around 8% in aggregate for the month. Platinum miners continued to rally in July as trading statements showed profits would exceed expectations. Retailers were a mixed bag, with Woolworths rallying after a trading update showed better-than-expected sales growth in its SA stores, particularly from its food division. At the opposite end of the spectrum, Massmart guided to an earnings loss as constrained customers hold off on purchasing discretionary items in its stores, sending the stock down over 15% on the day. Local food producer, Pioneer, was the biggest gainer for the month (+56%) as it received a R24bn buyout offer from global drinks behemoth, PepsiCo. Zeder, Pioneer’s biggest shareholder, also rallied 36%
Fund and Portfolios Overview
All asset allocations outside of property ended the month with a positive return, led by Scottish Mortgage ,up more than 6% for the month. On average the equity exposure within the fund was up close to 5%, outperforming the 4.25% delivered by the MSCI ACWI. Alpha generation from stock picking was therefore particularly strong, supplemented by a growth bias in a low growth world . As we write this the 30 YR US bond has hit an all-time low of 1.97% , pricing in a very low growth environment going forward. The fund has been building up a little dry powder to deploy into the sell off for risk assets taking place in August.