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South African assets continued to outperform through the month of July, with local Equities gaining 3.9% and Bonds 4% whilst global Equities only returned 1.4% in Rand terms. There has been a significant sectoral rotation in the Global market, where the Large-Cap technology stocks that have gone up in a straight line for the last few years on the back of Artificial Intelligence (leaving them at ridiculous valuations), sold off significantly. This somewhat closed the relative valuation gap, but these shares remain at extreme valuations, and we remain with our underweight stance.
The data is pointing towards the US labour market being under significant strain, and as such the Federal Reserve have confirmed in their latest meeting that they still plan on cutting rates in September. The Bank of England in their latest meeting already cut their benchmark rate by 25bps, thus it seems the long-awaited rate cutting cycle many have been waiting for, might finally be upon us.
In a surprise move, the Bank of Japan raised interest rates by 25bps to the highest level since 2008 and thus is not zero anymore for the first time in decades. The Bank of Japan also announced that they will halve their rate of bond buying going forward, which sent the Yen soaring by more than 7% against the dollar for the month in total. This in an attempt to get ahead of the curve on inflation which is a major shift from its previous stance of lagging behind the curve to protect its economy.
South African inflation slowed slightly to 5.1% in June, from 5.2% in May leaving it at its lowest level in 6 months. This on the back of the slowest gain in food prices since September 2020. The Bond market seems to have priced this in already, as yields were very much unchanged across the entire curve on the publication of the latest CPI numbers. The new Government of National Unity seems to be running smoothly thus far, and all indications point to some significant improvements in keys areas already, which is extremely encouraging in such a short space of time. This, combined with some much-improved relationships with the likes of the United States indicating a much friendlier attitude to doing business with South Africa going forward, is all contributing to many key market players believing that our economy might finally be on track to show some long anticipated improvements in 2025.
Considering the recent gains, our Equity market still offers value but on matrices such as historical PE ratios, at first glance it does not appear as blatantly cheap as it was. This mostly as the earning part of the equation was low, but if analyst forecasts are taken into account and thus looking at forward looking PE ratios using earnings forecasts, the value is still abundant.
Multivest Asset Allocation views
Multivest - Simon Morrison
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