Global equities had another strong quarter, overcoming a bout of significant turbulence at the start of August. Weak US labour data put the ‘hard landing’ thesis for the US economy back on the table which, compounded by a surprise hawkish move by the Bank of Japan (BoJ), led the VIX volatility index to touch its highest level since March 2020, when concerns around the pandemic were at their peak.

However, sentiment improved as the quarter progressed, helped by central banks’ dovish pivot including the US Federal Reserve’s decision to cut rates by 50bps and the BoJ’s indication that further tightening would depend on financial stability. US economic data also proved to be more resilient than feared, helping global equities rise for a fourth straight quarter.

Meanwhile, China unveiled its most substantial stimulus package since the pandemic to boost its ailing economy. This helped the country’s equity market post its best quarterly performance since 2009. European and UK equities also advanced albeit by a smaller magnitude. Japanese equities, however, were the exception as they fell back for a second quarter following the BoJ’s rate hike.

Looking at market leadership, Q3 saw a noticeable rotation away from tech stocks. Real estate and utilities were the top-performing sectors within the MSCI ACWI, while industrials and financials also outperformed. By contrast, IT and communication services lagged after some disappointing earnings numbers called into question the elevated valuations. Energy was the weakest performer amid the sluggish economic growth outlook.

Source: Bloomberg, for the quarter ending 30 September, 2024.

Q3 was a tumultuous period for US markets, with the S&P 500 posting both its biggest one-day slump and best rebound since 2022 following a weak jobs report that stoked fears of a recession at the start of August. However, these fears were soon dampened after the Federal Reserve’s 50bps rate cut, enabling the S&P to post another quarter in the green for its best year-to-date performance of this century.

Notably, the equal-weighted S&P 500, which removes the imbalance of the heavily-weighted mega-cap tech stocks, outperformed the market-cap weighted index, signalling a broadening of the rally. The small-cap Russell 2000 index comfortably outperformed its larger peers in anticipation of lower interest rates ahead. A number of disappointing earnings results cast doubt on big-tech company valuations, with the ‘Magnificent 7’ lagging the broader market for the first quarter since the end of 2022. This meant tech was one of the weaker sectors along with energy, with interest-rate sensitive pockets of the market such as utilities and real estate leading the way.

South African equities continued their strong run in September, closing Q3 firmly in positive territory. Key drivers over the quarter included the prospect — and subsequent realisation — of policy easing in both the US and South Africa, as well as progress towards the implementation of market-friendly reforms in South Africa (following the formation of the Government of National Unity). Further tailwinds came towards the end of September after China unveiled stimulus measures to support its ailing economy, prompting renewed impetus towards risk assets globally. On the currency front, the rand continued its momentum over the quarter, supported by a combination of a weaker US dollar and a positive shift in sentiment towards the South African economy. In terms of economic indicators, September saw the South African Reserve Bank (SARB) cut its key interest rate by 25bps to 8.0%, as widely expected. Annual inflation eased to 4.4% in August from 4.6% in July, while core inflation fell from 4.3% to 4.1% over the same period. Factory activity returned to growth, with the local PMI increasing to 52.8 in September following a reading of 43.6 in the previous month. Meanwhile, South Africa’s economy grew by 0.4% quarter-on-quarter in Q2, supported by a full period of uninterrupted power supply as Eskom’s Generation Operational Recovery Plan continues to make inroads.

Source: Bloomberg, for the quarter ending 30 September, 2024.

Hope returned to China’s equity markets towards the end of Q3 after an uneventful July and August in terms of government intervention and support. There were pockets of positive data points throughout the quarter, but by and large the economy remained under pressure, and the slow decay of the property sector continued. Investors had high hopes coming into the Third Plenum conference in late July, but there were no major policy surprises, which agitated the market. August proved extremely volatile, in keeping with markets globally, due to a combination of weaker domestic data and global contagion effects from a faltering US economy and the partial unwind of the yen carry trade. However, glimpses of hope emerged later in August amid a modest improvement in data, coupled with news that state-owned enterprises (SOEs) would be allowed to issue special bonds to buy unsold inventory from property developers.

The end of the quarter witnessed a revival when Beijing announced a coordinated stimulus plan. The monetary policy sleeve of the package, aimed at boosting capital markets, was well received by investors. The People’s Bank of China (PBoC) announced a RMB800 billion injection to entice companies to buy back their own stock and to encourage asset managers, brokers and insurers to invest in domestic equities. It reduced the main policy rate from 1.7% to 1.5% and announced cuts to the reserve requirement ratio for lenders of 0.5%, with further scope for cuts this year.

In the property sector, mortgage down payments for second homes were lowered from 25% to 15% to entice buyers back into the market. The PBoC also instructed lenders to further lower mortgage rates by the end of October, and it improved the terms of its recent initiative for SOEs to buy unsold inventory. Several larger cities confirmed either a partial or total removal of restrictions on home purchases to boost sales.

Capital market sentiment has risen strongly, but concerns over the trajectory of the economy remain. The call for increased fiscal spending, and the implementation of rate cuts, raised market expectations for additional stimulus, particularly on the fiscal front. The focus on stimulating domestic consumption renewed optimism for long-awaited measures aimed at stimulating demand. In the meantime, weak economic activities and corporate earnings revision trends continue to challenge market expectations. The MSCI All China Index rallied 23% in September and finished just under 23% for the quarter.

Emerging market (EM) equities, measured by the MSCI EM Index, delivered a strong quarter of gains, up 7.9%, comfortably clear of their developed market peers (MSCI World Index, +6.5%). The first month of the quarter witnessed a momentum reversal as stocks which had done well in the first half of the year began to underperform. This was largely due to a) China’s persisting economic strain, b) a downturn in commodity prices, and c) a rotation out of some valuation-stretched tech stocks. Furthermore, investor sentiment was knocked on the promises of AI as earnings beats slowed, albeit from lofty valuations, and this had a pronounced impact on Taiwan and South Korea’s tech-heavy markets. EMs were then rocked by the spike in volatility in global equity markets at the start of August following a US recession scare, which was compounded by an unwinding of the yen carry trade.

Ultimately, September was the month that defined the quarter for EMs, powered by an injection of stimulus from Beijing and a bigger-than-expected rate cut in the US. Asia ex-Japan outperformed its major peers helped by the China stimulus package. China and Hong Kong were standout performers as policymakers announced a coordinated raft of monetary policy measures, easing of mortgage restrictions, as well as liquidity support for the stock market. Despite concerns over stretched valuations, Indian equities enjoyed a solid quarter of gains on the back of strong growth prospects and a surge of retail investors into the country’s stock market. Elsewhere, Latin America closed the performance gap to its EM peers on the back of strong performance from Brazil.

European equity returns were more muted than global peers, with a steady stream of weak economic data and political uncertainty causing concern. Germany’s reliance on manufacturing was a further drag amid both weak demand from China and rising competition from cheaper alternatives, with a slew of car makers warning on profits towards the end of the quarter. A key measure of business sentiment, the Ifo index, dropped in September to its lowest level since June 2020, when the pandemic had shuttered Germany’s economy. Against this backdrop and falling eurozone inflation, the European Central Bank cut interest rates by 25bps.

UK equities also rose – recovering from the challenging start – but had a weaker quarter than their global peers. Large-cap stocks lagged smaller peers given the weakness in oil markets, with the FTSE 250 and All-Share indices posting stronger advances amid broadly positive UK-specific news flow over the period. The Bank of England (BoE) cut interest rates for the first time in four years, although Governor Andrew Bailey cautioned against a premature declaration of victory against inflation. However, consumer confidence did fall in September in advance of October’s UK budget announcement, which is expected to lay out stringent measures to fix what the government has stated is a damaged economy. At the sector level, consumer staples and utilities were the best performers, with energy the big loser given global growth concerns.

Starting in the US, falling inflation and expectations of rate cuts led to a sharp fall in Treasury yields. As was expected by some, the Federal Reserve reduced interest rates for the first time in four years in its September meeting. After much debate across markets, a larger 50bps cut reflected a slowing labour market and increased confidence around inflation dynamics.

In Europe, the European Central Bank made its second 25bps rate cut of the year in September, prompted by growing confidence around inflation dynamics and an ongoing backdrop of lacklustre economic growth. Inflation cooled to 2.2% in the Euro Area during the quarter, the lowest level since mid-2021.

Turning to the UK, inflation printed at 2.2% year-on-year in both July and August after reaching the Bank of England’s (BoE’s) 2% target in June. The increase was largely due to housing and household services costs. The BoE cut rates by 25bps in August then kept them on hold in September as expected. With inflation at 2.2% and interest rates at 5%, monetary policy is highly restrictive, therefore falls in Gilt yields were less pronounced than in other markets.

The Bank of Japan (BoJ) hiked its policy rate by 15bps to 25bps at the end of July. Somewhat offsetting this hawkish move from the BoJ, the pace at which it will reduce its government bond purchasing programme was slightly slower than expected. In addition, the BoJ said that it will not raise rates when markets are unstable. This dovish statement contributed to the 10-year yield falling over the quarter.

Source: Bloomberg, for the quarter ending 30 September, 2024.

Given the rally in sovereign bond yields across the US and Europe, credit markets had a positive quarter across the asset-class spectrum. The top performers were asset classes that pay fixed coupons; these benefited from the fall in risk-free rates over the quarter, particularly in the US – where investment-grade and high-yield bond markets both delivered solid returns. In Europe, the high-yield market and the investment-grade market posted similar total returns, with spreads little changed across both markets.

Floating-rate assets such as leveraged loans and collateralised loan obligations (CLOs) lagged fixed-coupon bonds, as they did not benefit from the rally in bond yields. However, credit spreads tightened more meaningfully in these market segments – boosted by improved sentiment over the macroeconomic outlook – while carry also helped them to deliver strong absolute returns.

Starting with local currency markets, the index (JP Morgan GBI-EM) appreciated 9% over the third quarter, with 3.8% from local bonds and 5.2% from EM FX. Bonds gained across the EM regions, notably in South Africa and Latin America. The former was helped by falling inflation and a positive election outcome while bonds in the latter continued to benefit from many central banks continuing with their rate-cutting cycles. For EM FX, gains were most apparent in Asia, with these currencies particularly sensitive to the weakness in the US dollar and the interest rate differentials with domestic yields and US Treasuries. However, currencies in Latin America suffered from an unwinding of the Japanese yen carry trade during the quarter, which was induced by the BoJ raising its policy rate.

Turning to hard currency sovereign debt markets, the JP Morgan EMBI GD gained 6.2%, led by high-yield issuers, although investment-grade market returns were also strong. The hard currency market was a beneficiary of falling US Treasury yields and the global rally in risk assets. Latin America was a top-performing region, with El Salvador, Ecuador and Argentina all posting robust returns in their bond markets. Argentina’s economy continued to show an improving fiscal picture over the quarter. Ukraine’s hard currency debt market was a top performer, after the country reached a debt-restructuring deal that was better than expected. In Africa, Egypt performed well after the IMF board approved the staff-level agreement and disbursed over US$800 million, while headlines suggesting that Saudi Arabia would be investing US$5 billion into Egypt provided a further boost.

Within EM corporate debt markets, both the rally in sovereign bond yields and the market’s increased confidence for a soft landing in the US helped the asset class to deliver another good month and quarter. The JP Morgan CEMBI BD gained 1.2% in September and 4.5% over the third quarter. Both the high-yield and investment-grade segments performed in a similar fashion from a total return perspective, with the high-yield market benefiting more from credit spread tightening (reflecting improved sentiment) and carry, while investment-grade bonds were boosted by the fall in US Treasury yields.

Within the EM corporate debt index, all sectors and countries delivered positive total returns, with notable performers being issuers in Latin America, led by Argentina and Colombia, as well as issuers in Africa.

Source: Bloomberg, for the quarter ending 30 September, 2024.

Chinese stimulus, the prospect of faster interest-rate cuts and gains in risk-asset markets broadly provided a positive backdrop for many commodities in September and in Q3 overall. The price of gold touched new highs in the month, rising another 5% to US$2,634 per Troy ounce. That brought its quarterly gain to 13%. The precious metal continued to be supported by the shift into a declining interest-rate cycle and a desire for perceived safe-haven investments amid geopolitical tensions. Among industrial metals, fears over the health of the Chinese economy continued to weigh on iron ore for much of Q3. But the quarter ended positively, with a 5% gain for the metal in September on the announcement of fresh support for China’s property sector and other parts of the Chinese economy. Copper also rose. In agriculture, the prices of corn (+12%) and wheat (+10%) rose sharply in September, with the global supply outlook weakened by expectations that extreme weather in Russia will result in a poor harvest and after US reports that corn stocks and wheat production were lower than expected. Oil bucked the generally positive trend, with the price of a barrel of Brent crude slipping about 9% in September to about US$72 per barrel, resulting in a decline of 17% over Q3. The fall came despite risks to supply from conflict in the Middle East, with markets reflecting concerns about substantial supply expected to come online in 2025.  

Source: Bloomberg, for the quarter ending 30 September, 2024.