After a strong first half of the year for markets, July saw more muted returns in local currencies. ZAR returns experienced by SA investors for offshore asset classes were, however, boosted as the rand fell in response to the general risk off environment. Towards the end of the month, the European Central Bank (ECB) signalled that further stimulus was on the way and the US Federal Reserve lowered US interest rates for the first time in 11 years, by 0.25%.

July Overview

The month of July saw mixed data coming out of South Africa. Inflation remained in check at 4.5% year-on-year ending June and in a much-expected move by market participants, the Monetary Policy Committee (MPC) cut the repo rate by 25bps to 6.5%. This comes against a backdrop of a very weak local economy and a global environment in which central banks in general are becoming more accommodative as global growth concerns have increased. For the first time since the central bank started giving the breakdown of the vote in 2016, the MPC panel provided a unanimous decision. In his statement the Governor, Lesetja Kganyago, raised a need for the government to compliment the monetary policy stance with structural reforms that would benefit the economy in order for the interest rate cut to have any lasting positive benefit. This was met in the following week by an announcement from government that an additional R59bn would be allocated to Eskom over the next two years surprising markets and also raising concerns of the debt trajectory of the country.

At the end of the month labour statistics were released which showed that the official unemployment rate had moved to 29% in the second quarter from a previous reading of 27.6%. On a more positive note the ABSA Manufacturing PMI index increased to a reading of 52.1 from a previous number of 46.2 (a reading of 50 is neutral).

For the calendar month, the rand performed reasonably well with weakness occurring after month end. The table below summarises the rand’s performance for the month:

In the UK, Boris Johnson was appointed as the new prime minister with roughly two-thirds of the vote in the final round of the Conservative party leadership contest. Johnson immediately ratcheted up no-deal planning and rhetoric in an attempt to strengthen his hand in negotiations with the EU. This promptly led to a sell-off in the pound with markets fearing this increased the chances of a messy exit on 31 October, despite parliament’s opposition to crashing out without a deal. This uncertainty is likely also a factor in the worsening UK consumer outlook, with retail sales falling for a third consecutive month.

The main event of the month came right at its end when the Fed reduced US interest rates by 0.25%, described by Chairman Jerome Powell as a “mid-cycle adjustment to policy”. This was less dovish than markets were hoping for and markets duly sold off. Macro data from the US were actually quite good, with the jobs market bouncing back from a weak print in June and second quarter GDP growth coming in at a stronger than expected 2.1% annualised. Manufacturing, however, remains a weak spot, with July’s purchasing managers’ index (PMI) close to falling into contractionary territory. US earnings season is currently in full swing and has proved slightly better than expected so far, albeit after expectations were set very low by analysts.

July saw many of the top EU jobs decided after recent EU elections, as well as the nomination of current head of the IMF, Christine Lagarde, to take over from Mario Draghi as leader of the ECB. Although not an economist, Lagarde’s political nous and perceived dovish stance were generally welcomed by markets. Whilst it didn’t change its rates policy at its July meeting, the ECB did strongly hint that a stimulus package is coming, with tiered interest rates (to cut rates whilst protecting bank stability) and further asset purchases both being considered. Data in July were generally weak though, with German manufacturing data and Europe wide business surveys declining to six-year lows.

Chinese data were mixed, with second quarter GDP growth slowing down but retail sales and industrial production data showing some tentative signs of stabilisation. There was optimism around progress for a US/China trade deal during the month, although this was shattered through the medium of presidential tweet after month end, on 1 August.

Asset Classes

After a strong June local asset classes fell in July as trade war rhetoric and cautious central banks dampened risk appetite globally. The result was a poor month for local equity and local property. Local bonds also blew off steam as the continued burden of SOE’s on the fiscus shone a bright light on just how fragile the states debt profile is. The rand’s weakness relative to the US dollar resulted in global asset classes performing better in rand terms. Emerging market equity in US dollars performed weakly as global investors shunned EM assets across the board.

A summary of the month’s asset class performance is shown below:

GPS PERFORMANCE FEEDBACK – JULY 2019

GBP Asset Classes and Currency Performance

July was a positive month for all asset classes, with sterling returns on international assets boosted by the fall in the pound. US equities were the strongest performing asset class over the month, whilst European equities, both continental and UK equities, were the weakest performing equity regions.

A search for yield boosted emerging market bonds over the month, although the fall in global yields meant all bond asset classes performed strongly.

A weaker pound and rising Brexit pressure saw the FTSE 100 outperforming the FTSE 250, up 2.4% and 1.3% respectively.

GBP ASSET CLASS PERFORMANCE FOR THE MONTH

GBP CURRENCY PERFORMANCE FOR THE MONTH

USD Asset Classes and Currency Performance

The US dollar strengthened over the month dampening asset class performance when viewed in the currency.

USD ASSET CLASS PERFORMANCE FOR THE MONTH

USD CURRENCY PERFORMANCE FOR THE MONTH

PROFILE PERFORMANCE – JULY 2019

Local Profile Performance

Period performance for the profiles as at the end of the month are shown below (all periods greater than a year are annualised) :

REGULATION 28 PROFILE PERFORMANCE

Although the underlying building blocks of the PortfolioMetrix portfolios are very important in the build-up of client returns, PortfolioMetrix prefer to judge their performance based on our multi-asset products. The chart below shows the five year returns of the Regulation 28 curve of their seven profiled funds against their usual balanced peers: 

Although the return environment in absolute terms has been very tough for South African investors, on a relative basis the portfolios have held up well, particularly from 2018 to date.

 

DISCRETIONARY PROFILE PERFORMANCE

 

GPS Profile Performance

Period performance for the profiles as at the end of the month are shown below (all periods greater than a year are annualised):

PMX UCITS – GPS (GBP) PERFORMANCE

PMX UCITS – GPS (USD) PERFORMANCE

(Compiled by Nic Spicer and Brendan de Jongh- PortfolioMetrix)