Just last week we talked about the potential impact of lower interest rates on the markets and now, seven days later, we have already seen some interesting developments. We mentioned that over all, lower interest rates would be positive for shares and bonds, and that bonds would be the better medium-term performer if the USA should go into a recession. We also mentioned that shares would be the longer-term winner and definitely outperform bonds if the US were lucky enough to avoid a recession. Well, over the past week shares have been slightly up and longer-term bonds have been slightly down in the US. What this tells us is that the markets don’t expect the US economy to go into a recession and that the Federal Reserve in the US might not lower interest rates as quickly as most people expected, because inflation is coming down but the labour market is still strong.
If we turn our eyes towards South Africa, we see something encouraging. In our previous blog we mentioned that the SA equity market was still struggling because commodities were not performing well. The biggest driver of commodity prices is the Chinese economy and nothing had been happening there for a while. In a somewhat surprising development, the Chinese government recently announced a strong stimulus initiative in the country which saw most Chinese shares surge, taking our mining shares with them. The Hang Seng index is up 11% in five days, and so is the Shanghai. SA companies like Anglo American is up 9% and BHP 7% in five days. We can only hope that this will continue.
Looking forward, the next bump in the road will be the US elections in November. As things stand now, the race is still too close to call and both candidates have material policy flaws. We are quite confident that whatever happens, the markets in the long run will weather the storm and do what they always do, but the shorter-term uncertainty might cause some volatility. If your portfolio is in need of a cash top-up, it might be prudent to take advantage of the stellar performance in your equities to top up what is needed on your cash and bond side. As always this decision is linked to your personal circumstances and a good chat with your portfolio manager is advised.