OUTvest Market Commentary - September 2021

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12 October 2021
South African Markets

South Africa seem to have passed to 3rd wave peak in coronavirus infections, the average new cases  were just above 1500 at the end of September from above 10000 same time last month. [i]

This led South African President Cyril to adjust lockdown restrictions, from level 2 to 1 level. This was widely welcomed by hard hit industries such as hospitality and alcohol.

The South African economy performed better than expected in the 2nd quarter of 2021, Africa’s most industrialized economy grew by 1.2% Q/Q compared to the 0.7% that was previously expected. The Agricultural and transport sectors were the star performers recording 6.2% and 6.9% gains respectively, while the Construction sector contracted by 1.4%.  Even though the South African economy experienced four quarters of consecutive growth the economy is 1.4% smaller than pre-pandemic levels.[ii]

The South African Reserve Bank Monetary Policy Committee kept interest rates unchanged in their recent meeting in September 2021, the SARB forecasts inflation to average at 4.4% for 2021 and 4.2% and 4.5% in 2022 and 2023 respectively.

Despite the July riots the SARB revised South Africa’s economic growth prospects from 4.2% earlier to 5.3%, this can be attributed to strong commodity exports.

South African Equity markets had a disastrous September, the broader market lost more than 3.5% in September, with the market selloff led by the resources sector which lost more than 9%. This was caused by falling commodity prices, for example Iron-Ore which lost 50% since Mid-July. Muted demand coming from China and the possible collapse of Chinese property developer Evergrande added to the pullback in commodity prices. Kumba Iron ore and Impala Platinum who were previously star performers on the JSE posted heavy losses of 24% and 23% for September respectively.[iii]

The more hawkish tone from the U.S. Federal Reserve and higher global yields weighed on South African Bonds, nominal bond performance was down 2% for the month of September.

 

US Markets

In September the U.S Federal indicated that it will tighten the loose monetary taps sooner rather later,  as it is expected to slow its asset purchase program and announce tapering in November. The Fed indicated it expects 6 to 7 interest rates hikes by the end of 2024.[iv]

Prices in the world’s largest economy continue to rise, inflation came in at 5.3% in August from 5.4% in the previous month. The spending increase was driven by a jump in goods outlays, specifically food and household supplies, likely reflecting a shift away from activities like dining out and travel due to heightened health concerns.

US non-farm payrolls were disappointing in August, the US economy added “only” 235 000 new jobs in August from 733 000 estimated by economist interviewed by Bloomberg.[v]

US equities were in turmoil in the month of September, September was the worst month since March 2020. Most major indices were down.  The blue-chip S&P 500 lost more than 4.5%, the tech heavy NASDAQ lost just above 5% and the DOW also 4.3%.

 

European Markets  

Angela Merkel’s 16-year rule of Europe’s largest economy is coming to an end, and she seems justifiably described as one of the greatest leaders in recent times, and has led Germany with stoic professionalism not often seen in politics.

Germany’s federal election on September 26th yielded a close finish. The centre-left Social Democratic Party (SPD) took the largest share of the vote and will be the largest party in the new Bundestag, narrowly beating the centre-right Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU) into second place.

After growing at 1% in June, the United Kingdom economy only grew 0.1% in July, this was primarily caused by the surge in the delta variant as employees were forced to self-isolate and consumers spent less.

The Eurozone economy grew by 2.2 % in the 2nd quarter of 2021 as the easing of restrictions spurred economic activity, as in mid- September the Eurozone countries have vaccinated more than 65% of their total population.

European equity markets followed the global trend in the month of September, the blue-chip index Euro 350 lost nearly 3% in the month of September. The DAX also suffered heavy losses due to the uncertain political future, the German equity index, fell 3.6%. [vi]

The Eurozone’s 2nd biggest economy, France, also suffered heavy losses, the CAC lost 2.6% of its value in September.

European nominal Bonds indices were also mostly down, with inflation-linked bonds being the only fixed income indices which gained in September, investors are paying up to hedge against for expected inflation.

 

Emerging Markets

The Banco Central do Brasil (BCB) hiked interest rates by 100 basis points to 6.25%, in-line with market consensus.  The Brazilian central raised rates for the fifth time since the rate hiking cycle started in March.  The monetary authority also acknowledged inflation will be higher than expected, inflation is expected to be 8.5% for 2021 from 6.5% previously estimated.

In an unexpected move the Turkish Central Bank cut interest rates by 1% to 18%, the move pushed the Turkish Lira to an all-time low. Turkey’s inflation is currently sitting at over 19%, and real interest rates are negative for the first time since October last year.

The Chinese government crackdown continued into September, with plans to make private tutoring business non-profit organizations. Macau gaming is also under scrutiny from Chinese regulators, Beijing plans to tighten rules on casino operation in Macau ahead of gaming license renewals in 2022. The Chinese economy grew by 8% in the 2nd quarter of 2021 compared the 18.1% in the 1st quarter.

Evergrande, the Chinese property developer, who has debt equivalent to 2% of Chinese total GDP, missed its payment obligations in September, despite having a 30-day grace period. If the property developer collapses and Beijing doesn’t come to its rescue, it is feared it could spill over to the broader economy, as it’s touted to be the Chinese version of Lehman Brothers.

Emerging Markets suffered the same fate as their developed markets counterparts, the MSCI emerging markets index was down 8% in the 3rd quarter of 2021.

Chinese equity markets felt the heavy hand by Beijing, the S&P China 500 lost just over 2% for the month of September and 10% for the quarter.

The Indian equity market is one of few equity markets that experienced gains in September, the S&P BSE Sensex gained nearly 3% for the month of September.

 

Funds on the OUTvest Platform

The turmoil in global and local markets filtered through into our funds, all of our funds were negative in the month of September. The losses were cushioned by good dividends that we received from companies such as Anglo Platinum, which declared record dividends due to strong performance of commodity prices earlier in the year.

Even though our funds didn’t perform according to our expectations in the month of September, our 3 year performance ending September 2021 is still decent both in an absolute term and relative to its peers. All of our funds managed to beat 50% or more of their peers in the same ASISA category, with the Coreshares OUTaggressive Index Fund and the Coreshares OUTcautious Index Fund beating 74% and 75% of their peers respectively.

For a more detailed look at the month please see downloadable PDF here.

 


 
Sources
[iii] S&P indices
[v] https://www.economist.com/german-election-20213
[vi]S&P Indices
 
 
OUTvest is an authorised FSP. All our investments are exposed to risk, not guaranteed and dependent on the performance of the underlying assets. Past performance is not indicative of future performance. Individual investor performance may differ as a result of fees, the actual investment date, the date of reinvestment and dividend withholding tax. Collective investment schemes are generally medium to long-term investments. Ts and Cs apply.
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