Market Commentary




By Shoaib Vayej, Portfolio Manager

Global economy strongest growth in a decade

For the first time since the Global Financial Crisis (2008), the global economy is exhibiting synchronous and above trend growth. Economic momentum in advanced economies is extremely encouraging, indicating continued acceleration in growth. Extremely accommodative, coordinated monetary policy from central banks has been a key driver of this trend. The absence of inflation in this cycle has allowed policy makers to remain supportive but it also presents a puzzle in terms of structural deflationary forces at play. The implied reduction of stimulus in 2018, indicated by expected reduction of central bank balance sheets, remains a key risk for both the global economy and central banks in terms of their response.

The United States (US) witnessed three rate increases of 25 basis points (bps) each during 2017, with a similar rate of increase expected in 2018. Furthermore, the Federal Reserve Bank (the Fed) has started to reduce the size of its substantial balance sheet, built through multiple rounds of quantitative easing (QE), placing some pressure on the long end of the yield curve. The US yield curve has started to flatten as a result these actions, but still remains upward sloping. The selection of Jerome Powell to succeed Janet Yellen as Fed Chairperson signals continuity in monetary policy. US fiscal policy has become stimulatory with the passing of significant tax reductions by the Trump administration. 

Although the European Central Bank remains in QE mode, it has signaled a slowing and potential end to the programme by the end of 2018. This change in stance, at the margin, together with more supportive growth in European economies has seen the US Dollar weaken against the Euro and other major currencies. 

China witnessed a smooth leadership transition at its 19th Party Congress. With Xi Jinping having consolidated power, he is likely to reemphasise his reform agenda in 2018 which may slow growth somewhat. Chinese monetary policy already started tightening towards the end of 2017 which is likely to slow the real estate market. This remains a key risk for commodity prices and economies dependent on commodity exports.

South Africa (SA) has lagged the global economy by a wide margin given political uncertainty and policy choices that often proved to be a drag on growth. Business and consumers have remained very cautious given the uncertainty, with extremely pessimistic outlooks and minimal expenditure. The 2017 medium term budget laid bare the poor state of the fiscus, leaving government with no room to stimulate the economy. Standard & Poor’s (S&P) joined Fitch in downgrading SA’s local currency rating to junk status soon after the budget statement, leaving only Moody’s retaining an investment grade local currency rating. A downgrade by Moody’s at their February 2018 review presents risk as some foreign holders will become forced sellers of bonds. The ANC’s 54th National Conference at the end of 2017 was a decisive moment for the party and country. The outcome was unexpected and market friendly. While it remains to be seen how much political capital Cyril Ramaphosa has to effect a turnaround, the supportive global backdrop and the evolving political landscape have brightened the country’s economic outlook significantly.

“SA Inc.” rallies from oversold levels

Global equity markets continued their strong run during the past quarter yielding total returns of 5.6% in US Dollars, with emerging markets outperforming with a 7.5% return. The MSCI SA equities index was one of the best performing globally, returning 21.5% in US Dollars. The Rand was one of the strongest emerging market currencies, strengthening by 9% in the quarter, mainly on the back of the ANC conference result. From an asset class perspective, SA equities performed significantly better than bonds and cash.

The outcome of the ANC conference led to a rerating of shares exposed to the local economy, with the JSE’s performance being led by interest rate sensitive shares. General Retailers (+22%) were led by Foschini (+45%) and Mr Price (+37%) which both reported good financial results. Banks (+28%) were led by ABSA (+31%) and FirstRand (+32%). The overhang from Barclays’ holding of ABSA shares has been substantively removed through multiple book builds. FirstRand announced the acquisition of Aldermore in the UK which removes the drag from its large cash reserves and complements its existing Moto Novo operations.

Kumba Iron Ore (+72%) was the top performing share during the quarter, driven by a strong recovery in iron ore prices from weaker mid-year levels as well as better than expected performance at the flagship Sishen mine. Exxaro (+32%) benefitted given its interest in Sishen Iron Ore Co; further monetizing of its Tronox stake at high price levels and good progress on its second empowerment deal.

Imperial (+37%) was another notable performer on the back of a turn in the local car market as well as a re-rating in anticipation of the upcoming split in the group into separately listed Automotive and Logistics businesses in 2018. 

The quarter witnessed the dramatic collapse in Steinhoff, with the share losing 92% of its value. At the beginning of December 2017 the company announced the delay of its results publication, citing accounting irregularities, and the resignation of its Chief Executive Officer. Later in the week the company announced that there was uncertainty over €6bn of assets which placed the stock under further pressure, with concerns over its solvency and liquidity. Post quarter end there is still insufficient information to reliably invest in the stock and we await audited results and the outcome of forensic investigations to make an objective determination.