Market Commentary




Mila Mafanya - Head of Equities

Weak dollar adds shine to metal prices

Since the recent peak in the US dollar exchange rate during the first week of 2017, the market has seen a 10% reversal in the currency versus a basket of currencies, through to the end of September. The weakness is attributable to newly-elected US president Donald Trump’s inability to implement policies outlined in his election thus far and the lower appeal of US bonds versus their European counterparts as a result of the combination of rejuvenated economic growth in Europe and more tempered pace of interest rate hikes, signaled by the US monetary policy makers.

The backdrop of the weak US dollar has largely been a windfall for commodity prices which become more affordable for countries which use their own local currencies to buy the US dollar priced commodities. Coincidentally, demand for commodities has also been fairly resilient in 2017 on the back of return to synchronous global growth for the first time in a number of years. This favorable cocktail of a weak US dollar and resilient demand in 2017 has seen commodity prices rally strongly in the first quarter then consolidate in the second quarter before resuming the rally into the third quarter.

Aside from the positive impact that the weak US dollar has had on commodities, the weakness has also been a benefit for all asset classes with investors being more risk seeking. Equities have broadly outperformed bonds and asset flows into emerging markets equities and bonds have seen emerging markets outpacing developed markets in both asset classes. This pattern was again evident in the third quarter performance of investment markets.

Policy makers and politics have dominated proceeding

On the local front in South Africa, policymakers and politics were a noteworthy influence on investment markets in the third quarter.

In July, the Monetary Policy Committee (‘MPC’) surprisingly cut interest rates by 25 basis points. The market was more surprised by the timing rather than the cut itself given previous indications that the interest rate cycle had reached its peak. At the next sitting in September the MPC surprised the market once again, this time keeping interest rates on hold following the second quarter GDP rebound from the weak first quarter GDP print and looming fiscal and political risks.

The political risk flared up in July when opposition parties proposed a motion of no confidence in President Jacob Zuma which he survived in the parliamentary vote in August. With the African National Congress (‘ANC’) elective conference approaching in December 2017, tensions have run high within the ruling party with three way race emerging for the Presidency which heightens the political uncertainty for investors. Additionally the credit rating agencies are also watching the political environment in SA closely for the first signs of undermining of the independence of institutions, lack of reform on state owned enterprises and fiscal slippage which may leave the country in an adverse fiscal position. Despite the weakness in the US dollar in the third quarter, the Rand was the second worst performing currency in emerging markets as a result of these self-inflicted risks.

Resources and interest rate sensitives rally

Similar to the experience at a global level, local equities have outperformed; registering returns of 5.9% in Rands, ahead of their bond and cash counterparts which delivered returns of 3.7% and 1.8%. The 3.6% weakness in the Rand/US dollar exchange rate meant that international investors received a return of 1.9% for the quarter.

Resources led the charge, returning 17.8% for the quarter, supported by the buoyant commodity prices and the weak Rand/US dollar exchange rate. Diversified miners Anglo American (+41.7%), South 32 (+30.9%), Glencore (+27.4%) and BHP Billiton (+22.3%) were the best performing shares in the SA market for the quarter, mirroring a similar trend in both developed and emerging markets courtesy of the London Metal Exchange and Brent Crude Oil prices which were both c.9.5% higher. The bulk commodity shares responded to rebounding iron ore prices following a sharp correction in the second quarter with Assore (+46.6%), Kumba Iron Ore (+39.8%), Exxaro Resources (+35.3%) and African Rainbow Minerals (+28.9%) all providing healthy returns to investors.

Local interest rate sensitive shares i.e. banks (+7.7%) and retailers (+5.3%), benefited from the surprise interest rate cut at the beginning of the quarter. Property development shares, many of which have significant offshore exposure and hence benefit from the rand weakness, ended the quarter +10.0%. Property development and banking shares led the financial sector 5.1% higher for the quarter.

Rand hedge industrials shares, which generate the majority of the profits offshore, were boosted by the weak Rand/US dollar exchange rate with Richemont (+16.0%) and Naspers(+15.0%) continuing their advances for the year of +45.5% and +38.3% respectively. These two shares have been contributed a disproportionate amount to the returns generated by SA equity markets for 2017 thus far.