Market Commentary




US Fed and Brexit dominate the global stage
Following a shaky start to the year in January, the first quarter of 2016 will be fondly remembered as a ‘risk-on’ rally, which saw the broad basket of risky assets gain favour amongst investors with a consequent outperformance of less risky assets. The key triggers for this renewed risk appetite was a change in tone from the U.S. central bank (Fed); signalling a more subdued outlook for U.S. interest rate hikes (than previously guided), increased monetary stimulus from the European central bank (ECB) and the Chinese government allaying market fears of a marked slowdown in China’s economic growth.

In this environment, the U.S. dollar set the tone for global markets with the ‘risk-on’ rally taking hold on the belief that the U.S. dollar had peaked. As a consequence it weakened almost 4% by the end of the 1st quarter. Emerging market equities and currencies rallied; commodity prices found welcome relief led by precious metals; cyclical shares outperformed defensive shares and the market rewarded undervalued shares with ‘Value’, as an investment style, outperforming other styles.

The month of April largely showed a continuation of the of the first quarter momentum with the U.S. dollar weakening a further 1.5% during the month.

In May, the U.S. central bank kept interest rates on hold but minutes of the meeting cited the possibility of a hike in June, which saw the U.S. dollar reversing its weakening trend over the previous 3 months and ended the month 2.1% stronger versus a basket of currencies. Investor sentiment hastily shifted from “risk-on” to “risk-off” with emerging market equities hardest hit. Commodity prices fell as well with the exception of oil, which hit year-to-date highs.

All bets on a June interest rate hike from the U.S. Fed swiftly diminished when employment numbers in the U.S. economy (Non-Farm Payrolls) disappointed market expectations for the second consecutive month. The U.S. dollar weakened by 1.8% in the first 3 weeks of June - which saw a resurgence of the ‘risk-on” thematic that dominated markets for the first 4 months of the year.

On the 24th June the citizens of the UK took the world by surprise by voting to exit the European Union in a move coined by campaigners as ‘Brexit’. On the day, the U.K. Pound dropped by 10% to hit 31 year lows; $2.5 trillion of value was wiped off global markets across all asset classes whilst safe-haven assets rallied as the gold price spiked; the U.S. dollar strengthened while U.S. & Japanese bond yields fell. Following two days of panic-selling, the global equity markets swiftly bounced back from the ‘Brexit’ lows to end the month marginally down 0.6% in U.S. dollars with global bonds being the only asset classes to record positive returns for the month - on the back of safe-haven buying of bonds as yields dropped.

Resources revival continues, SA downgrade averted and Brexit casualties suffer
The S.A. asset class performance mirrored the picture in the global markets in the quarter with SA equities’ return of 0.4% lagging both cash and bonds which delivered returns of 1.8% and 4.4% respectively.

Within sectors, resources shares were the stand-out performers, leading the market as they did in 1Q16, posting returns of 6.4% on the back of the ‘risk-on’ rally, higher commodity prices and the outperformance of ‘Value’. Industrial metals ended the quarter 39.6% higher, led by the iron-ore plays in particular Kumba Iron Ore, which reacted to the significant earnings upgrades and Chinese economic data releases which supported local steel production. Gold producers were amongst the best performers in the market rising 16.4% as direct beneficiaries of the 7% rise in the dollar gold price over the quarter, with the outperformance playing out following the safe-haven buying of gold on the ‘Brexit’ fallout at the end of June

The financials index fell 4.1% over the 3 months with the key drivers of this underperformance being the uncertainty over the SA sovereign ratings downgrade at the beginning of June and the surprise ‘Brexit’ vote at the end of June. Banks underperformed the market in the 2 months preceding the anticipated downgrade but then staged a resurgent performance following the decision by Standard & Poors (S&P) to maintain SA’s sovereign rating at investment grade. The ‘Brexit’ vote disproportionately impacted the UK exposed financials with significant sell-offs seen in the UK listed property shares of up to 17% (Capital & Counties , Intu Properties, New Europe and Redefine International) with Investec (18.0%), Brait (-16.2%) and Old Mutual (-6.2%) following suit.

Industrials ended the quarter up 0.5% with the index weighed down by the share price falls of ‘Brexit’ casualties Netcare, Richemont, Steinhoff. The winners within industrials were large companies that benefited from good news flow over the quarter. Telkom rallied 19.9% following a good half-year and a dividend surprise whilst Naspers shares hit all-time highs results supported solid results from their associate Tencent . On the mergers & acquisition front, Aspen Pharmacare was up 13.1% as it came back into market favour post announcing a debt restructure and a large deal with global pharamaceutical company Astrazeneca. Food producers, Pioneer Foods and Tigerbrands, delivered strong returns of 25.0% and 12.6%, respectively, driven by a belief amongst investors that the negative impacts of the drought conditions would subside into the 4th quarter of 2016. MTN Group’s share price found some relief with the announcement of the Nigeria fine resolution at a miserly 1/3rd of the original penalty imposed.