Risk-off sinks emerging markets in June quarter

AFTER reeling from interest rate concerns in the first quarter, global equity markets had a relief rally in the second quarter and were up by more than 5 percent at the beginning of June. The rally was cut short by a surge in the price of crude oil, while concerns about a trade war between China and the US escalated.

While developed market equities as measured by the MSCI World Index still managed to close the quarter just more than 1 percent higher than the March quarter, the risk-off phase that already had become apparent at the end of the first quarter resulted in a meltdown in emerging market assets.

Emerging market equities as measured by the MSCI Emerging Market Index ended the quarter 8.7 percent lower than the previous quarter.

The sell-off of emerging market assets also led to a sell-off of emerging market currencies and was amplified by a stronger US dollar, which saw the derived emerging market currency index ending the quarter nearly 5 percent down against the greenback.

Global bonds also came under pressure as a result of inflation concerns and the JPMorgan Chase Global Bond Index returned a negative 3 percent for the quarter as bond yields increased by 10 basis points to 1.58 percent.

Although metal prices as measured by the Economist Metals Index held their own during the quarter, the price of gold bullion succumbed to the US dollar’s strength and closed the quarter $73 (R976.50) per ounce down from the previous quarter.

The flight to quality assets together with domestic issues such as the expropriation of property without compensation saw a massive sell-off of the rand, which ended more than 16 percent lower against the US dollar.

The South African bourse as measured by the JSE all share index underperformed the MSCI Emerging Market Index by about 2 percent in terms of US dollars, but managed a return of 4.5 percent with dividends reinvested for local investors – abysmal compared to the 18.4 percent for South African investors who invested through the rand in developed markets as measured by the MSCI World Index. The returns of the individual sectors of the JSE during the past quarter was a mixed bag.

The JSE Resources sector was boosted by relatively steady metal prices in terms of US dollars and the rand’s collapse. The sector was by far the best performer with a total return of 19.6 percent with dividends and other income distributions reinvested.

The JSE Industrial Index returned 4 percent while the JSE Financials Index returned a negative 6 percent. Mediumsized companies as represented by the JSE Mid Cap Index returned a negative 7.2 percent, while the JSE Small Cap Index fared better with a negative return of 4.5 percent.

On the interest-bearing front South African bonds had a dismal quarter. The JSE Assa All Bond Index returned a negative 3.8 percent with interest reinvested as the yield to maturity jumped 82 basis points to 9.44 percent. It was even worse for foreign investors who were invested at the end of last quarter experiencing a total return of minus 17.2 percent.

Developed market properties as measured by the FTSE EPRA/NAREIT Developed Dividend + Index returned 5.1 percent in terms of US dollars, while South African investors invested at the previous quarter would have been pleased with a return of 22.1 percent in terms of rand.

Local investors who were invested in gold bullion have seen the price of their asset growth by 9.8 percent in rand terms, despite the $73 drop in the gold price.