Although August began with notable volatility, global markets performed well during the third quarter of 2024, with gains across both equities and fixed income. This positive momentum was largely supported by interest rate cuts from key central banks, including the US Federal Reserve and the European Central Bank. Additionally, a more dovish approach from Japanese policymakers, along with new stimulus measures in China, boosted investor sentiment and drove a substantial stock rally as the quarter concluded. In contrast, oil markets followed a different path, with prices declining over the course of the period.
In terms of market leadership, quarter three witnessed a clear shift away from tech stocks. Real estate and utilities led the MSCI ACWI's performance, with industrials and financials also delivering strong results. IT and communication services however underperformed, as weaker-than-expected earnings raised concerns about high valuations. Energy emerged as the worst-performing sector, weighed down by a sluggish economic growth outlook.
Key notable third quarter highlights
US MARKETS
The US markets experienced significant turbulence in quarter three as the S&P 500 not only experienced its sharpest single-day drop but also had its strongest rebound since 2022, showing signs of the long-awaited "broadening out" of returns.
Notably, U.S. value stocks outperformed growth stocks by 7%, and small-cap stocks rallied in anticipation of lower interest rates. The Dow Jones index reached record highs, delivering +8.2% over the quarter, while the tech-heavy Nasdaq rose 2.6% q/q.
At their September meeting, U.S. Federal Reserve members agreed to a larger-than-expected 0.5% rate cut, marking the first reduction since March 2020. This lowered the key lending rate to 5%, down from a 20-year high. The Fed cited early signs of weakness in the U.S. labour market and easing inflation as reasons for the cut, while expressing confidence in continued economic growth. A review of interest rate expectations from the start to the end of the third quarter shows a clear shift, with investors now anticipating lower rates by mid-2025 compared to earlier forecasts.
EUROZONE/ UK MARKETS
With inflation slowing and economic activity subdued, other developed market central banks also cut rates. In September, the European Central Bank lowered its rate to 3.5%, marking its second cut, while the Bank of England began its easing cycle with a 25 basis-point cut in August and held rates steady at its September meeting.
Major European equity markets rose in September (Euro Stoxx 50, +1.04% m/m), driven by growing expectations of interest rate cuts amid slowing business activity in the region and China's stimulus measures. In contrast, the UK stock market declined in September, with the FTSE 100 falling by 1.67%.
Germany's reliance on manufacturing weighed heavily on its economy, hindered by weak demand from China and increasing competition from lower-cost alternatives. Several car manufacturers issued profit warnings late in the quarter. Additionally, the Ifo index, a key gauge of business sentiment, fell in September to its lowest point since June 2020, when the pandemic had brought the German economy to a standstill.
ASIA
Optimism returned to China’s equity markets late in quarter three, following a quiet July and August with little government intervention. In September, the government introduced its largest economic stimulus package since the COVID-19 pandemic, aiming to revive an economy struggling with a weak property market, deflationary pressures, and low investor confidence.
The People’s Bank of China (PBoC) announced an RMB 800 billion injection to encourage companies to repurchase their own shares and prompt asset managers, brokers, and insurers to invest in domestic equities. The Politburo also pledged additional fiscal support for the housing market, signalling a direct focus on stabilizing the property sector. Alongside these measures, the central bank cut policy rates, underscoring the urgency of the government’s efforts. As a result, the Shanghai Composite Index and Hang Seng Index surged 17.39% and 17.50%, respectively, over the month.
Elsewhere in Asia, Japan's Nikkei index closed September down 1.88% (-4.2% 3Q24) amid mixed economic data. The decline was fuelled by expectations that incoming Prime Minister Shigeru Ishiba would implement policies aimed at maintaining a strong yen, which could negatively impact Japanese exporters.
LOCAL MARKETS
South African equities extended their strong performance in September, ending Q3 on a positive note. The local market benefited from improved global investor sentiment, driven by China’s new stimulus measures, easing monetary policies from both the US Federal Reserve and the South African Reserve Bank (SARB), optimism surrounding South Africa's Government of National Unity (GNU), and the absence of loadshedding for nearly six months. As a result, the FTSE/JSE All Share Index gained 3.34% in September, bringing its year-to-date increase to 12.56%.
September also saw the Reserve Bank lowering its repo rate by 25 basis points to 8.0%, bringing the prime lending rate to 11.50%. While further cuts are expected, the Monetary Policy Committee remains cautious, emphasizing close monitoring of inflation risks.
South Africa's Consumer Price Index (CPI) dropped to 4.4% year-on-year in August, down from 4.6% in July, marking the slowest rate in nearly three and a half years. With CPI remaining within SARB’s 3%-to-6% target range for two consecutive months, inflation appears to be more firmly anchored.
The local currency strengthened against the U.S. dollar over the month, as general U.S dollar weakness and a cautious SARB pushed the rand to its strongest level in nearly two years, closing September at R17.26/$ (+3.2% m/m). Year-to-date, the rand is 6.3% stronger against the greenback. SA government bonds continued their rally in September, as yields on the 10-year dipped -0.35% over the month, ending at 8.85%.
Credits: Strategic IQ, Ninety One, Investec, Bloomberg
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