Equity markets eased off recent highs in September as many of the risks that investors seemed to have been ignoring started creeping to the forefront. This caused a flight to safety that led the MSCI All Country World Index to fall 4% (in USD) in September, marking the worst decline in a year. Emerging markets slightly outperformed their developed counterparts with the MSCI Emerging Markets Index printing -3.97% against -4.15% from the MSCI World Index.
There were three predominant factors contributing to the risk-off sentiment. One of them being the slowdown in China – the second-largest economy in the world – and the severe pressure their property sector has come under. For some time now, the Chinese property sector has been in a debt bubble, however, it recently grabbed global attention when Evergrande (the largest property developer in the world) missed key interest payments which in turn sparked fears of a collapse in one of the most important sectors of the Chinese economy. While it is evident that they are not capable of servicing their gigantic pile of debt, participants are trying to weigh up what impact Evergrande will have on the broader market and whether China will let it pose a systemic risk. For now, the shock seems to be contained and has not filtered through to the other sectors of the economy.
This, coupled with ongoing regulatory crackdowns turned Chinese equities lower in September. The MSCI China Index printed -5.0% and Hong Kong’s Hang Seng also sank -4.8%.
Another concern is the US debt ceiling debacle. The debt ceiling is a limit on the total amount of acceptable federal debt which was initially introduced to ease the process of raising capital. This limit has officially been hit by the US government and hesitancy in raising it has sparked fears that the US might not be able to meet any of their financial obligations once they deplete their cash reserves. The consequences of a default on the supposed ‘safest’ asset in the world would without a doubt be catastrophic. Although this worst-case scenario is a concern for markets, the belief is that the US will ultimately come to their senses and raise the limit.
Finally, there is the concern surrounding inflation. Inflation has been the central theme around markets for a while now however it has recently become evident that it should not be taken lightly. Although central banks predominantly still believe that inflation will subside as everything begins to normalise following the covid-related distortions, I do not think that any of them thought inflation would be sustained for as long as it has. Supply chain disruptions, labour shortages and rising energy prices are putting sustained pressure on price levels. This has spurred central banks globally to begin pulling back emergency support sooner than expected and has brought forward expectations surrounding the timing of rate increases.
In the US, the personal consumption expenditures index (the Federal Reserves preferred inflation measure) remained elevated above the 2% target at 3.6% (y/y) in August. The sustained rise in price levels will likely see the Fed begin tapering bond purchases before the end of the year which could mean that a hike in interest rates will happen sooner than expected. This has pushed up the longer-dated bond yields (with the US 10-year yield hitting a high of 1.636%) which in turn hurt equity markets, in particular, technology stocks as increased yields make it tougher to justify their lofty valuations. As a result, the S&P 500 (which also has a large weighting in tech stocks) ended the month with -4.7%, the Dow Jones Industrial 30 printed -4.2%, and the tech-heavy Nasdaq was down 5.3%.
Commodity markets continue to impress with the Bloomberg Commodity Index printing 4.97% for September. The big mover was Brent Crude oil which is currently trading around US$83 per barrel for the first time since 2018. The rise can be attributed to a tightening market as supply struggles to catch up with the surging demand. On the other hand, there was a sharp decline in metals prices with gold printing -4.6%, platinum -5.6%, copper -4.5%, nickel -6.8% and palladium -25%. The steep decline in palladium is predominantly due to the global shortage of semiconductor chips which is hampering vehicle production. Aluminium was the outlier returning 5.0%.
Locally, inflation came in at 4.9% (y/y) for August as compared with 4.6% the month before. This marks the fourth consecutive month that inflation has printed above the Sarb’s midpoint of 4.5%. Despite the uptick in inflation, the South African Reserve Bank kept the repo rate unchanged at 3.5% at its September meeting. On the contrary, it is largely anticipated that we will see a 25 basis point hike in the fourth quarter this year followed by further increases through 2022 and 2023.
A hawkish tone from central banks, weak metal prices and the global flee to safer assets all hurt the rand in September. The rand depreciated against all three majors, losing 4.0% against the greenback, 2.0% against the euro, and 1.9% against the pound.
South African equities also ended September in negative territory with the JSE All Share Index returning -3.1% driven by the slowdown in China, poor performing resources due to falling metal prices, and the global rush to safety. As such, resources returned -12.5%, followed by Industrials with -1.8%, and Financials printing 0.78%. Listed Property was also down at -2.3% and SA Bonds tracked the weaker rand returning -2.1% in September.
With the start of the third-quarter earnings season underway and the many uncertainties facing markets, we can expect a volatile period ahead.