The South African stock market saw its biggest monthly fall in June, since the start of the pandemic in March, 2020 as the FTSE/JSE Capped SWIX benchmark followed global markets sharply lower.
The index was -7.5 percent down month-on-month in June. The local bourse was holding up relatively well in the year-to-date, with strong commodity markets supporting the country’s terms of trade and low domestic equity valuations attracting flows as investors switched out of relatively expensive growth shares, Anchor Capital’s Peter Little said yesterday.
However, the prospects of accelerated global monetary tightening started to increase the possibility of a slowdown in global economic growth, and there were few places for investors to hide in June– the local bourse was not one of them, said Little.
Old Mutual Wealth investment strategist Izak Odendaal said June was “a brutal month for global equities”, capping the worst first half of a year since the launch of the MSCI All-Country World Index in 1987.
The S&P 500’s first-half performance “has not been this bad since 1962. Global bonds were also deeply negative,” said Odendaal.
Flagship Asset Management fund manager, Pieter Hundersmarck, said strongly performing resources’ stocks supported the JSE this year, but June saw resources also begin to fall due to fears of lower global growth, which slows commodity demand.
Hundersmarck said while there “is always money to be made on the JSE”, long-term investors needed to be cognisant of the big past growth drivers on the JSE, and that demand came from China growing at about 6.5 percent a year, and quantitative easing, which was coming to an end.
China was moving to stimulate its growth, but its current emphasis was consumer-led, not a big demand driver of traditional commodities, which pointed to lower long-term returns for large local investors, he said.
Miners were among the worst performers in the month, down 14 percent month-on-month with Anglo American the worst of the bunch (-24 percent month-on-month), as commodity prices dropped.
Iron ore fell 13 percent month-on-month, and platinum dropped 7 percent month-on-month in dollar terms.
Companies geared towards the domestic economy also fared poorly as banks and insurers fell 13 percent and 15 percent month-on-month, respectively.
Rare bright spots for local equities came from Mediclinic (+20 percent month-on-month) and Naspers/Prosus (+38 percent and +30 percent month-on-month, respectively).
Mediclinic received an unsolicited buyout offer from Remgro in a consortium with Mediterranean Shipping Company, which the Mediclinic board recommended rejecting.
Naspers and Prosus saw their share prices rally on news their management would start selling down the shares of their biggest underlying investment, Chinese tech group Tencent, and would be using the proceeds to buy back their own shares.
Pick n Pay (+5.7 percent month-on-month) also managed to deliver a positive monthly return as it narrowed the valuation gap with peers, said Little.
Rising inflation, both locally and globally, and the prospect of tighter monetary conditions were enough to push SA’s 10-year government bond yield to 11 percent by month-end – up from 10.3 percent at the start of the month, said Little.
Excluding a brief foray above 11 percent at the start of the pandemic, the government’s 10-year borrowing rate reached 11 percent for the first time in more than 20 years. Challenges at SA’s power utility added to the market’s pessimism.
The South African rand fell 3.9 percent month-on-month against the dollar, dragging it slightly lower (-2 percent) year-to-date against a strong US currency, said Little.
Odendaal said given the depth of the decline and the murky macro backdrop, it seemed unlikely that first-half market losses would be reversed in the second half, although a recovery “will happen eventually”.
He said “market punches were flying in the first half, but we need to stick to the plan. The plan is to be appropriately diversified and focus on valuations, not volatility.”
Independent analyst Ryk de Klerk said over a 10-year period, JSE returns were still broadly in line with global stocks and with growth being stimulated in China, layoffs starting in the US and supply chain disruptions returning to normal, the current bear market might be short-lived.
He said, however, much would depend on “the end game by Russia”, in the Ukraine conflict.
edward.west@inl.co.za
BUSINESS REPORT ONLINE