October saw a significant rally in most major markets, helped by a compromise on the US federal budget and by a continuation of the upswing from September after the Federal Reserve delayed tapering of quantitative easing.  This ran in contrast to the International Monetary Fund’s latest GDP forecasts, which shaved -0.3% off global growth for 2013, led by a -0.5% decrease in expected emerging market growth.  European forecasts actually increased, up +0.1%, a reflection of the continent’s gradual recovery from a series of government debt crises in peripheral countries over the past few years.

Nevertheless, the continuation of quantitative easing and removal of potential negative events in the near term outweighed any concerns about global growth.  Virtually every major equity market in the world was up in October except for China and Japan, with the MSCI World index up +3.8% for the month and +19.8% YTD.  Yields on US Treasuries and German Bunds fell to 2.55% and 1.67%, respectively, though they are still much higher than the 1.76% and 1.32%, at the beginning of the year.  Commodity prices stabilised after a difficult prior month, providing a boost to natural resource export countries; oil and gold were up +0.4% and down -0.6%, respectively.

South Africa’s JSE All Share Index rallied to an all-time high again, up +3.6% on the month and +19.2% YTD.  The country’s stock market has been lifted by strong growth amongst multinationals and retailers (many companies have successfully grown their businesses in sub-Saharan Africa and globally), strong foreign money flows, and a devaluation of the South African rand making exporters more competitive.  However, many analysts question the sustainability of the rally as not only do the markets seem overvalued, but the country’s central bank is forecasting only 2% GDP growth for 2013, and with inflation at 6.0% annualised in September and a -7.0% current account deficit, there is little likelihood of an interest rate cut. The platinum mining sector may also be hit with another round of strikes in early November, which could affect up to half of global output, putting further pressure on the rand currency.

In Asia, Japan’s Prime Minister Shinzo Abe announced that he will look to raise the consumption tax from 5% to 8% in April 2014.  This move is considered necessary to cut Japan’s gross public debt of 250% of GDP (the highest amongst major countries); however, it could potentially jeopardise the country’s nascent economic recovery.  After a very strong first half of the year, the Nikkei index has stalled; it was down -0.9% in October though is still up +37.8% YTD.  So far, Abe’s policies have aided corporate earnings in Japan, but further reforms and additional monetary stimulus will be necessary to sustain the rally.

Further south, the Reserve Bank of India put up its benchmark interest rate by one-quarter to 7.75% to counter rising inflation, especially in recent months due to higher cost of foodstuffs, though the central bank did unwind some of the emergency measures put in place to halt the rupee currency’s slide earlier this year.  Trying to escape economic problems at home, Indian Prime Minister Manmohan Singh visited China in an effort to settle border disputes and to find a way to alleviate the country’s $39bn trade deficit with its northern neighbour (an effect of India’s lack of competitiveness vis-à-vis China).  However, the depreciated rupee has renewed investor interest in India’s stock market; the SENSEX index was up an impressive +9.2% on the month and is now up +8.9% YTD.

The Chinese government itself has publicly named and shamed the ten cities with the worst pollution; this is a part of new President Xi Jinping’s efforts to reform China’s industrial and investment-led economy to become more consumption-led.  The country’s leadership is preparing for the third plenum of President Xi’s tenure in November; the plenum is traditionally the first major platform for a new administration in China to present its 10-year agenda.  The Shanghai Composite index was down -1.5% in October and is down -5.6% YTD.  However, the current market malaise may substantially change depending on what decisions come out of the plenum.

In Western Europe, the UK economy grew by 0.8% in the third quarter (3.2% annualised), the fastest pace since the middle of 2010, buoyed by a rebound in the construction sector and economic stabilisation amongst its major trading partners in the Eurozone.  The British pound and UK interest rates have risen substantially in recent months to reflect the better economic data, and the FTSE 100 was up +4.2% in October and is now up +14.1% YTD.

In the Eurozone, Italy’s parliament passed a confidence vote on Prime Minister Enrico Letta’s government and approved a 2014 budget designed to hold the fiscal deficit to 3% of GDP while providing reforms to boost the ailing economy.  Italy’s FTSE MIB index soared +11.0% in October as a result.

After nine consecutive quarters of contraction, Italy’s Latin neighbour Spain managed to eke out 0.1% GDP growth in the third quarter on the back of rising manufacturing output and a positive current account balance (versus a severely negative balance since the euro’s inception).  Spain’s IBEX 35 index was up +7.9% on the month.

The EU also finalised a broad free trade agreement with Canada.  This is a precursor to the intended negotiations with the US on the Transatlantic Trade and Investment Partnership agreement, which is intended to reduce non-tariff trade barriers (especially in service sectors, which represent the vast majority of GDP in these countries) between North America and Western and Central Europe.  Such an agreement would provide a significant boost to trade and productivity between these countries.  In the meantime, the European Central Bank held its main policy interest rate at 0.5% but announced no new initiatives, thus providing no assistance for what is still an anaemic recovery in the currency union.  The Eurozone is also waiting for Germany to form a new government after parliamentary elections last month; the country’s two largest parties have now begun talks to form a grand coalition.  The DAX 30 index was up +5.1% in October and +18.7% YTD as Germany’s economy has picked up in recent months.

In Brazil, oil company OGX, founded by the country’s formerly richest person Eike Batista, sought bankruptcy protection in the largest default in the region’s history.  The collapse of Batista’s business empire parallels Brazil’s own economic troubles, as the central bank had to increase its main interest rate for the fifth time since April (to 9.5%) to battle inflation caused by government overspending and an overly complex regulatory system that has stymied productivity growth.  Brazil’s Bovespa index has lagged other world markets; though it was up +3.7% in October, it is still down -11.0% YTD.

A humiliating 16-day shutdown of the US federal government ended only at the eleventh hour when Congress agreed to extend existing appropriations bills until 15th January 2014 and lift the debt ceiling until 7th February 2014.  On a more positive note, Federal Reserve Vice Chairman Janet Yellen was nominated to replace Chairman Ben Bernanke in February 2014.  Yellen is viewed to be an inflation dove and would be expected to maintain quantitative easing for longer, which is beneficial for financial asset prices (especially in emerging markets).  The S&P 500 rose +4.5% in October (and up to +23.2% YTD) on the back of the extension in budget negotiations.

The US budget battle was the last major potential negative event for 2013, so while equity markets have continued their rally and are relatively expensive, there is little to suggest this situation will change for the remainder of the year. The discussions around the debt ceiling into December and early next year may weigh on markets. The outcome of China’s plenum and the continuation of US budget negotiations into January will likely dictate the start of 2014.  In the meantime, Germany will need to form a government and continue to push the likes of France and Italy to make meaningful reforms to improve competitiveness.  Furthermore, emerging markets will need to start the difficult task of consolidating their balance sheets after a credit-fuelled bubble over the past few years.  One can easily foresee continued positive momentum in investment markets as long as consensus is happy with the progress of these factors.

Sources:  RisCura, Bloomberg, US Energy Information Administration, The Economist.

More information?

To have the monthly International Commentary delivered to your inbox, please subscribe here.

Media contacts

For media enquiries in South Africa, please contact Courtney Atkinson via email or on +27 (0)21 673 6999.
In the UK, contact Andrew Slater via email or on +44 (0)7930 442 883