Q3 Market Review: Key Takeaways
Interest Rate Cuts: In September, central banks in South Africa and the U.S. cut interest rates by 25 and 50 basis points respectively, marking the first rate cuts since the pandemic.
Equity Market Volatility: Global equity markets experienced their sharpest decline of the year in early August, with the MSCI World Index dropping 10.06%. This was partially driven by weaker employment data and inflation concerns, reigniting fears of a U.S. recession. Despite the volatility, many indices recovered with higher closes by the end of the month.
Bond Market Stability: U.S. bonds demonstrated strong performance, with many ranking in the top 5% for yields over the past decade, and 80% outperforming similar bonds from the past 20 years.
South Africa’s Strong Performance: South Africa has been a standout performer in 2024, with the Rand being the third-best performing emerging market currency against the U.S. dollar. South African bonds posted the highest returns among emerging markets, and the JSE was the world’s best-performing exchange in U.S. dollar terms.
The Rand continues to strengthen, appreciating against the dollar by 6.2% over the quarter and 9.9% since April. Year-to-date (YTD), the Rand is the third-best performing emerging market currency against the US dollar. While the Rand is expected to continue strengthening, now may be an opportune time to hedge into USD and other foreign currencies. It’s prudent to take advantage of the current Rand strength to convert funds into dollars. Many individuals make the mistake of waiting until the Rand weakens to R19.50 before moving funds offshore, which often results in less favorable rates.
South Africa lowered its interest rate for the first time since June 2020. The South African Reserve Bank (SARB) cut rates by 25 basis points (bps). This came the day after the U.S. Federal Reserve cut its own interest rates by 50 basis points. As a result of weak employment data, economists have increased their probability’s of a recession occurring, however still expect don’t expect one.
US: Upcoming Elections
Regardless of the outcome, investors should brace for heightened volatility in foreign exchange markets, although this short-term turbulence is unlikely to have lasting effects. In 2016, following Trump’s election, the market saw a swift shift, but it proved unsustainable—a pattern likely to repeat. Expectations for economic growth, commodity prices, and risk demand will also impact the U.S. dollar.
Under a Trump administration:
- Dollar Strength: Driven by significant fiscal expansion, increased government spending, and higher debt.
- Earnings growth: Corporate taxes are expected to decrease by 6%, leading to stronger earnings growth.
Under a Harris administration:
- Dollar weakness: Due to policy continuity and uncertainty around fiscal and tax policies.
While Trump’s policies may favour a stronger dollar, his past opposition to such outcomes adds uncertainty, which could heighten volatility if he wins the election.
SA: Domestic Outlook
South Africa has maintained a positive outlook following the recent elections, with the Government of National Unity (GNU) making tangible progress. This suggests that the optimistic sentiment for meaningful change is here to stay.
According to Standard Bank Research, South Africa’s real GDP growth is forecasted to reach 1.1% in 2024, 1.8% in 2025, and above 2.0% by 2026.
While change is occurring slowly, it appears sustainable at a systems level. Notably, loadshedding has become a thing of the past, with the country experiencing over six months without power cuts.
Q3 Equities Review
Markets saw a steep sell-off during the first few days of August before rebounding to end the month and quarter in the green. Several factors contributed to the sharp decline, with the MSCI World Index dropping 10.06% over four days. The main catalysts were Japanese yen carry trades spilling into other markets and weak U.S. employment data. Despite this, the World Index finished the quarter up 5%, double that of the average quarterly return of 2.5% over the past 10 years.
Year-to-date (YTD), the Johannesburg Stock Exchange (JSE) has emerged as the best-performing exchange globally. Despite this strong performance, domestic equities are still viewed as undervalued, suggesting potential for further growth. A lack of reliance on foreign investment is positive, with a volume predominantly being domestic. The equity market is seen to be correcting from ‘depressed’ levels, with the positive economic and political backdrop driving prices higher.
The quarter saw gains also filtered down to smaller-cap stocks, a positive sign that the market is becoming less concentrated. Whilst the S&P 500 grew by 5% as a whole, the index excluding the mag7 tech stocks grew by 7.6%. Despite the correction in tech stocks, US markets performed well, gaining 5.5% for the quarter with the markets now up 20.8% YTD.
The Nikkei dropped a record 22.6% over 3 days in August. It recovered well however, with the Osaka Exchange having to halt trading to prevent excessive buying after the market surged 10% on Tuesday.
Both UK and European equities delivered returns below the broader market for the quarter. China ended the quarter with a massive fiscal stimulus that sent their equity market soaring, with the Shanghai Composite gaining 12,5% over the quarter.
Q4 EQUITY Allocation
Q3 Fixed Income Review
Over the past two years, bond yields have remained elevated, offering fixed income investors the chance to lock in high-quality portfolios without taking on significant risk. For the first time in over a decade, fixed income provided attractive yields, allowing many to secure long-term, fixed coupon rates. While bond prices fluctuate and capital losses are possible, the consistent income generated by coupons has added strong dividend income to many portfolios.
However, the era of “higher rates for longer” has ended as central banks have begun cutting rates. Although the rate-cutting cycle is in its early stages, markets have already priced in significant future rate reductions—up to 125 basis points over the next year. As a result, bond yields have decreased substantially.
Yields on South Africa’s benchmark government bonds fell below 10% for the first time since April 2022, driven by a global risk-on rally and signs of fiscal stability domestically. Foreign investors bought the most South African government bonds in more than two years, attracted by yields amongst the highest in emerging markets.
Q4 Fixed income Allocation
Q4 Currency Allocation
United States Dollar (USD): Looming elections increases instability for the currency.
British Pound (GBP): The Bank of England is expected to cut rates more slowly than the Fed. The pound appreciated by 5.78% over the third quarter and is expected to strengthen further.
Euro (EUR): Despite weak growth and dovish policies, narrowing interest rate differentials with the US dollar support the euro.
South African Rand (ZAR): The rand is expected to strengthen. A positive economic and political backdrop further supports the currency.
Japan (JPY): The Bank of Japan (BoJ) is anticipated to continue normalizing rates in the first half of 2025, which should help narrow yield differentials.
