Brexit fallout short-lived

The surprise outcome of the Brexit vote in the UK, during the last week of June, completely wrong-footed markets leading to a sell off of UK Pound, trillions wiped off global markets and a resurgence of safe haven assets; in particular gold, the US dollar & developed market bonds. By early July, European and Japanese bond bonds hit all-time lows with almost $10 trillion of these bonds having dipped into negative territory.

Equity markets managed to regain most of the losses suffered in the days following the Brexit vote with European markets getting within 3% of the pre-Brexit market levels during the course of July. Sentiment towards emerging markets also improved with emerging market currencies strengthening - the South African currency being the best performing emerging market currency in July. In the same month bond yields spiked on the back of the Bank of England (BOE) and Bank of Japan (BOJ) central bankers surprising the market by not easing monetary policy in response to Brexit.

In August, the BOE eventually succumbed to Brexit pressures and cut interest rates to 25 basis points whilst in stark contrast across the Atlantic, there was growing consensus that US Federal Reserve (US Fed) would begin gradually increasing interest rates by the end of 2016. Precious metals prices, which had enjoyed a prosperous year in a low and negative yielding interest rate environment, started to peter out their yearly gains. Political instability took hold of local markets in August over the impending arrest of the South African Finance Minister, Pravin Gordhan, with the South African rand depreciating 5.8% during the month as consequence. South African equity markets bucked the positive emerging market equity trend over the month, falling 7.7% in US dollar terms largely due to the weakening South African currency.

During September, global markets were rattled by the fine imposed by the US Department of Justice (DOJ) on Deutsche Bank. In the last week of the month the Organization of Petroleum Exporting Countries (OPEC) agreed to modest production cuts which sparked a rally in the oil price to above $50 per barrel. Following a dismal August performance, when the South African rand was the worst performing global currency, the currency strengthened7.4% spurred on by receding political concerns, the anticipated inflow of capital in early October related to the ABInbev’s take-out of SABMiller, a better than expected current account and a rebound in local economic growth.

Cyclicals remain the flavor of the day

During the 3rd quarter, SA equities only returned 0.5% in rand terms being a notable laggard to cash returns of 1.9% and bonds which delivered 3.4% on the back of yields falling 27 basis points - largely due to the 7.3% stronger rand. Foreigners continued to be net sellers of SA equities in the quarter, consistent with the trend since the beginning of the year which has seen them disproportionately sell-down offshore-based shares.

For the 3rd consecutive quarter, Resources provided market leadership for the JSE All Share, by posting a return for the quarter of 8.1%; making its cumulative year-to-date performance 35.9%. This quarter’s outperformance was consistent with commodity shares being the 2nd best performing sector globally on the back of Chinese economic data that remained supportive of metal prices, leading to the continued outperformance of value shares. All Resource sub-sectors participated in this continued commodity rally with the exception of Gold (-10.1%) which began buckling in August with markets beginning to anticipate a US Fed interest rate hike by year end. Coal (26.9%), Platinum (22.6%), General Mining (16.6%) and Industrial Metals (10.8%) led the way with 7 of the top 10 performers in JSE All Share being resource shares.

Financials outperformed the JSE All Share slightly by registering a return of 0.8% for the quarter despite a fairly volatile 3 months; courtesy of the fluctuating currency on political grounds. Banks, in particular, found favour with investors, returning 9.9% for the quarter, following the decision by rating agencies not to downgrade South Africa sovereign credit rating in June. The South African Reserve Bank signaled the end of the interest rate tightening cycle by the end of the quarter which should augur well for bank defaults.

Industrials fell 2.0% over the quarter characterized by contrasting performances between local cyclicals and rand-hedge industrials. Local cyclicals; including construction (+12.3%), travel & leisure (+14.6%) and industrial transportation (+7.8%) were the stand-out performers with the exception being General Retail which declined 8.3% following a poor reporting season.

Most of the defensive industrial sectors, particularly those with significant offshore businesses, were weak given the strength of the rand during the quarter. Noteworthy amongst the defensives underperformers was Aspen which fell 14.4% following a disappointing full year result and the announcement of the sale by GlaxoSmithKline of its remaining shares in Aspen. MTN’s share price fell 16.1% during the quarter due to ongoing concerns over the economic turmoil in Nigeria, making mobile telecoms the worst performing sub-sector in the quarter.