A busy month for markets in October 2024
US elections, Iran’s missile attack on Israel, the ongoing Russia/Ukraine war and earnings season being well underway have all made for an interesting month - resulting in markets moving sideways with some volatility in between.
Introduction
October has been a busy month for markets with significant macro news flow as well as being in the thick of earnings season. Generally, markets have moved largely sideways for the month with a bit of volatility in between. The macroeconomic focus is clearly on the US election with a number of betting sites reflecting Trump as the next President of the United States. With only a few days left until the election both Trump and Harris are busy on the campaign trail with frequent jabs at each other to try take an edge in some of the key states.
From a geopolitical perspective Israel’s response to Iran’s missile attack has been seen as ‘controlled’ as they targeted military sites as opposed to key oil infrastructure. It remains to be seen whether Iran have a further response although markets appear to view the region as relatively calm at the moment. On the other hand, the Russian/Ukraine war is heating up with North Korea supplying 10 000 soldiers to assist Russia. This has escalated tensions with the West and likely puts pause to any hope of negotiations in the short term.
Earnings season is well underway with a clear trend of companies beating and guiding up getting rewarded whereas those that disappoint are being punished. Once again focus has been on the magnificent 7 with Tesla being the first to report and seeing a big jump following better margins. Google also saw a positive reaction whereas Meta and Microsoft were soft. The month saw Amazon and Apple round up big-name earnings with Apple reflecting some pressure from China and a slightly muted outlook whereas Amazon showed strength across most business lines.
The big news in the local market has been the Medium-Term Budget Policy Statement (MTBPS) which could be seen as slightly disappointing following all the excitement around the GNU. It was a stark reminder that South Africa remains on a fiscal cliff after many years of borrowing and despite the improved sentiment still needs to walk a tight rope to ensure the economy gets on the right path. National Treasury revised down the 2024 GDP forecast to 1.1% and sees growth of 1.7% in 2025 and getting up to 1.9% in 2027. This is lower than some corporate economists who see SA getting above the 2% mark. Still a far way from the 3% plus that we need to see significant job creation and a long-term shift in economic outlook. Tax collections were revised slightly lower although the outlook for the next two years still looks fine. The key aspect that spooked markets was the increase in the budget deficit of GDP from 4.5% to 4.7%. This will see an increase of debt to GDP to 74.7% and a peak of 75.5%. A positive from the statement is that Government is focusing on infrastructure spend and public private partnerships which should help stimulate growth in the right areas. SA needs to keep their fiscal discipline and hopefully with a better political climate there are bright days ahead.
Macro Environment
In recent weeks the big focus has been on the positioning for the presidential outcome. Most polls still see the race as evenly split however prediction markets are leaning towards a clear Trump win. Whether these markets are reliable is debatable as the user placing the bet could be based anywhere and have very little insight into the election. However, it does show there is a skew to Trump in certain circles. Another example is in Bitcoin which has seen a strong rally following the increased likelihood of a Trump win as he has promised a supportive regulatory regime. In the bond market we have seen yields back up and investors exit bonds as the view is with the growth-oriented regime inflation will return and the Fed will have to dial back rate cuts. Some analysts have even put forward a hike in 2025 if Trump were to take office. Following Trump’s previous win there was a rally in equities. The questionis whether there is room for a rally again. Harris policies are largely seen as a continuation of the Biden administration and unlikely to spark the same rally of a Trump win. However, in the medium-term Harris is seen as bringing less risk to the economy with lower debt and fewer extreme policies and likely maintaining better global relations. There is no doubt this is still a tight race and next week will be watched closely by markets. The chart on below from Bloomberg outlines how close swing states are. In reality it is likely these swing states determine the outcome of the election so it will literally come down to a small number of voters and what they end up deciding on the day. From an investment perspective we need to take a long-term view and try and avoid being caught up in short term volatility.
Asset Allocation
Our local asset allocation remains in line with September following the addition to SA Inc stocks. Our offshore asset allocation remains unchanged from a house view perspective although with recent growth clients have moved to the higher end of our range. We are watching the US election closely as well as other macroeconomic events and will assess positioning going into the end of the year. Offshore clients have been added to the newly established DI Hedged Equity fund which we are excited about its outlook and the role it will play in portfolios going forward.
Market Performance
October was a sideways month for markets with a sell off on the last day pushing them negative. During the month of October, the S&P 500 ended down 0.99%. The MSCI World index was down 0.97% for the month and the JSE saw a negative return of 1.34%. As per chart below the YTD performance of the JSE is up 11.04% (in ZAR), while the S&P500 is up 19.62% and the World index is up 16.22% (in USD), respectively.
Bonds
Bonds have been a volatile Asset Class over the last month as we have seen a backup in yields as the market looks to position for a Trump presidency. The view is that Trump’s proposed policies will likely see an increase in inflation and in turn require higher rates. This is against the move in September where following the Fed cut rates moved lower. We can expect this volatility to continue until the outcome of the election is known. The chart below reflects the move in the US 10-year bond which is a good benchmark for the asset class and reflects these moves.
Equities
The focus for equities has been earnings season. To date there have been some significant price moves based on earnings surprises. Where a company has beaten and guided up there has been a strong price movement. On the other hand, a miss has been punished. This is in line with what we have previously emphasized about the current equity market. As companies sit with lofty valuations there are high expectations priced in so in the event of a miss that lofty valuation sees a quick unwind. Where companies are largely in line with expectations companies tend to see slight pricing pressure as the market valuations are priced for beats. As we go through earnings the AI theme remains robust although there is a clear supply constraint coming through from data center capacity and further investment will be required although there is a time lag. In the semiconductor space we have seen a clear divergence between the high end more intelligent chips segment seeing very strong growth whereas the established segments of the market are seeing limited upside. Within more defensive names there is a clear focus on cash flow generation and a stable guidance outlook providing robust earnings such as in the case of Waste Management and the market providing additional upside. In order to get an idea of outperformance the chart below reflects Cadence Design Systems earnings beat this quarter (+13.8%) and in turn the out performance against the S&P500 of +12.6%.
Conclusion
We are fast approaching the end of the year and expect some volatility around the US election although markets will likely settle quickly and refocus on the key macro theme of central bank rates. This coupled with lofty valuations under pinned by strong earnings growth anticipation provide an interesting risk reward tradeoff for the remainder of the year. We are focused on protecting the returns achieved to date and positioning for 2025. As South Africa goes into the mad rush for December we want to emphasize we are available to clients to discuss portfolio details and the outlook to finish 2024 and position for 2025.