VIDEO: Market Snapshot July 2023

Our Market Snapshot provides an overview of key events that influenced financial markets over the course of July 2023.

A brighter outlook lifted investor returns in July as global inflation continued its downward trend, pointing to an approaching (if not immediate) end to central banks’ interest rate hiking cycles. This was reinforced by improved economic growth outlooks, especially in the US, and both equity and bond market gains reflected optimism on these fronts. While we welcomed these developments, we remained cautious in our global fund positioning:  in our view, US equity markets are somewhat over-optimistic in their pricing, while global bonds are vulnerable to inflation surprises. In the SA market we are less cautious given the ongoing excellent valuations at which many local assets are trading. As global conditions improve (however slowly), South African assets should also benefit from the turning cycle and – as we have said before – patient investors will be rewarded.   

M&G’s local funds all recorded positive returns for the month, with many helped by SA equity holdings including a collective overweight in banking shares, and strong performances from Northam, Foschini, Sasol and Naspers/Prosus. Our preference for SA bonds also added value. However, our offshore holdings broadly detracted from fund performance due to the 5.9% appreciation of the rand versus the US dollar in July which offset global asset gains, as did our overweights in Richemont, Textainer and Multichoice – the first two shares have been stellar performers in 2023 so far.

Looking at market returns in July, global risk-on investor sentiment buoyed both equity and bond markets, with some analysts noting that US Treasury bond yields may have peaked. This helped stem previous bond losses as the Barclays Global Aggregate Bond Index returned around 0.7% (in US$), while South Africa’s All Bond Index delivered approximately 2.3% (in rands).

Emerging equity markets were the main beneficiaries: the MSCI Emerging Markets Index delivered 6.3% compared to 3.4% from developed markets (MSCI World Index), with Chinese equities rebounding (MSCI China up 10.9%) and most other markets also in positive territory (all in US$). An exception to the positive news was Chinese economic data showing weaker-than-expected growth, deflation and a slowdown in trade, although the government did announce new fiscal measures targeted at re-accelerating economic activity, which lifted the local equity market.                                               

Meanwhile, South African bonds received a boost from several factors in July, including the SA Reserve Bank’s surprise decision to leave interest rates on hold at its 20 July Monetary Policy Committee meeting, and a sharp drop in consumer inflation to 5.4% y/y in June from 6.3% y/y in May largely on the back of softer food inflation. The All Bond Index returned 2.3%. Although chances are good for another rate hike in September (given the recent move higher in SA inflation expectations and the SARB’s determination to see CPI return below the 4.5% mid-point of its targeted 3%-6% range), most still see the SARB also nearing the end of its own hiking cycle after a cumulative 475bps of increases since November 2021.

SA equities were buoyed by the improved global sentiment: the FTSE/JSE ALSI returned 4.0% for the month, while the Capped SWIX produced 4.1%, led by Financials (+7.8%) and gains of 2%-3% across the other sectors. The stronger rand over the period weighed on offshore-oriented companies and detracted from global investment returns generally (in offshore currency terms).

While we don’t know if global inflation or bond yields have definitively peaked, and wouldn’t build investor portfolios according to such forecasts, we would say that at their current real yields we like certain global bonds, such as US Treasuries (with yields of around 4%-4.5%), UK guilts and select emerging market government bonds. SA government bonds remain our most preferred asset class with equity-like real yields of over 6% if held to maturity.  

Looking at SA equities, there have been some excellent opportunities to pick up high-quality companies at cheap valuations. There are those that benefit from a weaker rand by becoming more competitive, like exporters, and those that can benefit from higher interest rates, like banks. Additionally, companies with healthy balance sheets, little debt, and/or strong cash flows can still invest for future growth and gain an advantage over their peers. These are the types of companies that should perform well going forward – and we have invested in many at valuations that should more than compensate shareholders for the risks involved, as well as being cheaper than many of those to be found overseas.

Our best-view portfolios include a well-considered mix of attractive rand-hedge, “SA Inc” and defensive shares, with some of our preferred shares being BAT, Richemont, MTN, Textainer, Glencore, Reinet, Naspers/Prosus, and a collective overweight exposure to SA banks like Standard Bank, Absa and Investec.

Looking ahead, there are some factors that can provide tailwinds to the SA equity market, including falling inflation, a shift to expansionary monetary policy/interest rate cuts both globally and locally, private sector contributions to new sources of power supply and improving infrastructure, and the government’s acknowledgement of the urgent need to improve its service delivery.