September 2019: Financial markets wait on tenterhooks for US-China trade outcome

September started with the introduction of the first round of tariffs put in place by both the US and China and hopes of a tariff agreement bubbled under for the rest of the month, with a high profile meeting due to take place between the two countries in Washington in October.

Though looking marginally optimistic, trade tensions are weighing heavily on the global economy, sentiment, and emerging markets. In late September, the news that the US may be considering introducing capital controls on US equity investing in China upped the ante and pointed to a long road ahead for the two global superpowers.

Central bank actions again dominated the headlines and market narrative during the month, with the European Central Bank using most of what is left of its monetary policy firepower when it opted to reduce interest rates and revert to quantitative easing again in an attempt to revitalise economic growth in the region. The US Federal Reserve cut its official interest rate by 25 basis points as broadly expected but also pointed to a moderate outlook for interest rates, which put a dampener on investor optimism. US President Donald Trump railed against the modest reduction interest rates, wanting far more in an attempt to boost the economy ahead of Presidential elections next year.

Geopolitics kept financial markets on edge through the month, with US-Iran relations in the balance after the US accused Iran of being responsible for a drone attack on Saudi oil fields, which slashed 5% off the global oil industry’s production. Oil prices soared in response before easing back when Saudi Aramco, the state-owned oil producer optimistically estimated that it would take less than two months to recover the lost oil production.

Notwithstanding the volatility and tough economic quarter, global stock markets managed to remain in the black, with both developed and emerging market equities managing to notch up almost 2% gains on average in dollars. The MSCI World Index advanced 1.94%, and the MSCI Emerging Markets Index 1.91%.

In the US, the Dow Jones Industrial Average increased 2.1% during the month, while the DAX ended the month 4.1% and the Nikkei 5.7%.

In South Africa, there was good news on the economic front when the gross domestic product came in at 3.1% for the second quarter, reversing the 3.1% decline in the previous quarter. However, business confidence remains under severe pressure, and all eyes are on whether the government will follow through on its economic policy plan with action.

The FTSE JSE All Share Index eked out a 0.19% gain, with Industrials (up 4.5%) and Financials (3.5%) the best performing sectors during September. The worst performers were telecommunications (down 4.1%) and Technology (-2%%). Gold had a difficult September, slumping 14.9%.

The main event during the month was the Amsterdam listing of Prosus, the company that now houses Naspers’ Tencent holding.

The Rand ended the month little changed, but this disguised a significant rally and then subsequent depreciation back above the R15 to the Dollar level by the end of the month on global risk-off sentiment in the wake of possible US capital controls on China, which adversely impacted on emerging markets in general.

The All Bond Index outperformed the equity market, delivering 0.5%. The Stefi Composite Index pipped bonds to the post, gaining 0.6% during the month.

The SA Listed Property Index (SAPY) marginally outperformed the broader stock market, rising 0.3%. During September, the Rand appreciated 0.14% against the greenback and 1.14% against the Euro.

For the year to date, the ALSI and ALBI returned 7.1% and 8.4% respectively. Listed property returned 1.3% and cash returned 5.5%. The Rand depreciated 5.4% against the greenback and 2% against the Euro.

Over the 12 months to end-September 2019, the ALSI added 1.9%, while the ALBI took the lead with a return of 11.4%. Listed property slumped 2.7% over the 12 months and cash returned 7.3%.

Over the long run (10 years to September 2019), equities were the top-performing local asset class, delivering an annualised return of 11.5%. Bonds offered 8.8% and cash 6.5%, against consumer price inflation of 5.1%. Internationally, the MSCI World Index returned 16.8% in Rand terms, boosted by the weakening of the local currency over the past decade.