August 2021 market overview

August augurs well for low interest rates for longer

August was an eventful month for South Africans. President Ramaphosa reshuffled his Cabinet, leaving us with a new finance minister, Enoch Godongwana. Later in the month, the Department of Social Development released a Green Paper on Comprehensive Social Security and Retirement Reform with, among others, a proposal that it should be compulsory for SA employees to contribute 12% of their earnings to a government-run pension fund. After some push-back from the savings industry, the Paper has since been withdrawn. In the same month SA’s unemployment rate surged to a record 34.4%.

SA economy is bigger than thought

Every five years Statistics SA revises the GDP data it has on record. In August this department announced that the SA economy at the end of 2020 was 11% bigger than previously thought. The new GDP figure lowers the gross debt to GDP ratio to 71.1% for 2020/2021 from the previous figure of 80.3%. This has positive implications for SA’s creditworthiness, as debt to GDP is one of the main figures taken into account by ratings agencies.

Only one implied interest rate hike for SA in 2021

SA consumer prices rose 4.6% in July from a year earlier, compared with 4.9% in June. During August the SA Reserve Bank removed one interest rate hike from its implied benchmark policy rate path for 2021 (in its quarterly projection model), but it still sees a 25-basis-point increase during 2021.

US interest rates on hold until 2023

Global markets keenly watched Chairman Powell’s comments at the annual Jackson Hole Economic Symposium for any hints on when interest rates would lift from their all-time lows. Powell stuck to the view that the US inflation up-tick is transitory. He also announced that the tapering of asset purchases would start by the end of 2021, but that interest rates would remain on hold until 2023. The markets responded well to this reassurance, with the S&P 500 and the Nasdaq 100 indices reaching new record highs.

China’s crackdown continues

Beijing’s crackdowns on the tech sector has destroyed more than $1 trillion of market value from Chinese shares listed globally this year. E-commerce, private tutoring, data security and online content are all subject to new regulations. Alibaba shares dropped to a record low in Hong Kong, extending a selloff in Chinese tech giants after the industry was hit with a fresh round of regulations in August. China is currently studying separate proposals to further protect the rights of drivers working for online companies and to step up oversight of the live streaming industry.

August saw a property growth spurt

During August the local listed property index (SAPY) had a strong return of 7.46%, even though it’s not anywhere near its 2018 highs yet. SA equities as measured by the FTSE/JSE All Share Index (ALSI) lost 1.74% in total returns for the month. SA bonds (ALBI) gained 1.70% during the month and cash (STeFI) returned 0.32%. The MSCI World index (developed market global equity) returned 1.34% in rand terms for the month of August. The rand strengthened 1.12% against the US dollar and 1.57% against the euro.

The past year belonged to small caps

Last year this time, most markets were still substantially down from their previous highs. It’s little wonder then that most indices show strong returns over the past 12 months. The ALSI returned 25.16% for the year to end August. Listed property gained 51.02% off a low base. The ALBI returned 14.84% for the year, and cash gave 3.83%. The rand strengthened 14.62% against the US dollar and 15.72% against the euro over the 12 months to end August. Scanning all local sectors, small caps stand out from the crowd. After  a long period of underperformance relative to the Top 40, the small cap segment posted an impressive – even though short-term – return of 70.22% over the past year. Looking towards international markets, the MSCI World Index gave South African investors 10.80% in rand terms.

Over five years, global equity was your best bet

Over the past five years to August 2021, the ALSI returned 8.31% per year. Over 10 years, though, the figure looks much better at 11.44% per year. Bonds, at 9.62%, returned more than local listed equities over the past five years, but at 8.27%  lag equities’ 11.44% over 10 years. Listed property (the SAPY) was the worst performer over the past five years and returned -5.28% annualised. Cash gave 6.50% p.a. on average over the past five years. Global equity was your best bet over the past five years with the MSCI World Index (developed market equities) returning 14.45% annualised in rand terms over the five years to 31 August 2021.

Table 1: Total returns to 31 August 2021

Source: Morningstar | Total returns annualised to 31 August 2021