Market Commentary




By: Mila Mafanya
Head of Equities & Corporate Strategy at Afena Capital

Global Overview

Global markets trumped by trade wars

The fortunes of global markets in the second quarter of 2018 were dominated by the intensifying tensions surrounding an impending global trade war, a continuation of the strong rally in the US dollar and persistence in the surge of global oil prices.

In March 2018, US President Donald Trump (‘Trump’) lived up to his 2016 election promise of making the US more protectionist by announcing tariffs on steel and aluminum imports, further tariffs on $50bn of Chinese imports and accusations of violations of intellectual property rights by Chinese companies. This move threw the US and China into a captivating exchange where China vowed to retaliate with its own tariffs on imported US products; which threatened to derail a multi-decade, global trade order. This exchange made markets jittery as market participants could not agree on whether the threats would actually culminate in the imposition of counter tariffs between the US and China; and if so what impact this would have on the global economic growth momentum witnessed in the first quarter of 2018. By the end of the second quarter, Trump announced the imposition of 25% tariffs on $34bn of Chinese imports which took effect on the 6th of July 2018.

Following almost 5% weakness in the US dollar in January 2018, on concerns of a widening fiscal deficit and the US administration’s preference for a weaker dollar, the US dollar has since rallied close to 10% to the end of June 2018. The rally was prompted by US Federal Reserve (‘Fed’) maintaining its stance of hiking interest rates whilst to the surprise of the market the Bank of England (‘BOE’) kept interest
rates on hold in May 2018 and the European Central Bank (‘ECB’) in June 2018 pushed out its target date to begin increasing interest rates to late 2019.

The divergence in monetary policy across the Atlantic makes US bonds, which breached 3.0% for the first time since 2014, more appealing than their UK and Europeans counterparts and as a consequence the US dollar strengthened. The appreciation in the US dollar has put pressure on emerging market currencies, compounding the contagion from crises in Argentina and Turkey, and also led to sell offs in both emerging market bonds and equities.

The brent crude oil (‘Brent’) price rose 3.7% in the first quarter on the back of good demand fundamentals, the Organization of Petroleum Exporting Countries (‘OPEC’) supply restraint and supply disruptions in Venezuela. This momentum continued into the second quarter with Brent prices momentarily touching $80 per barrel for the first time since November 2014. The second quarter rally was further supported by OPEC agreeing to increase production by 1 million barrels per day which was read positively by the market given that the effective increase in production was likely to be closer to 600 thousand barrels per day given continued supply disruptions by some OPEC members and the reinstatement of sanctions on Iran.


SA Overview

SA Markets Shift From A Local To A Global Agenda

Local markets in the first quarter were largely swayed by the euphoria over the surprise election of Cyril Ramaphosa as the African National Congress’s president in December 2017 (“Ramaphoria”) which led to the Rand strengthening by 4.6% in the first 3 months of the year. In the second quarter, we saw a reversal of the Ramphoria effect with the 13.7% weakness in the rand being the primary driver of local equity market returns.

Given that over 60% of the earnings of the JSE are generated offshore, local equities led the charge from an asset class perspective delivering returns of 4.5% for the quarter. Cash managed to provide returns of 1.8% with property (-2.2%) and bonds (-3.8%) negatively impacted by the weakness in the currency.

Resources were the standout performers (19.6%) in the quarter as the fading economic growth momentum continued to support US dollar commodity prices despite the strength in the US dollar; with the weakness in the rand providing an additional boost. Australian diversified miners BHP Billiton (‘BIL’) and South32 (‘S32’), which BIL unbundled in 2015, rallied 31.9% and 26.1% respectively. Sasol (‘SOL’)
shrugged off the overhang of its Lake Charles project and finally responded to the soaring rand oil price to close the quarter up 24.7%. Mondi PLC (‘MNP’) shares increased 21.9% following better than expected earnings supported by the payment of a long awaited special dividend.

Industrials managed to eke out a 4.0% return in the quarter, largely driven by a resurgent Naspers (‘NPN’). NPN rallied 20.5% reversing some of the losses from the first quarter which was triggered by a global
sell-off in technology shares at the time. Local retailers fell between 20-30% on the back of a weak rand with Massmart (‘MSM’) and The Foschini Group (‘TFG’) plummeting 31.1% and 22.2% respectively.

Financials retraced by 6% in the quarter with all financial sub-sectors registering returns in negative territory given the weakness in the rand which typically hurts interest rate sensitive shares. Santam, Life Insurance and Banks consequently fell 12.5%, 11.0% and 7.8% respectively. Real Estate shares had a lesser fall (-2.8%) as the Resilient stable of companies (‘Resilient REIT, NEPI Rockcastle, Fortress Income
Fund and Greenbay Properties’) bounced c25-35% in the quarter following c45-75% falls in the previous quarter as a result of damning governance allegations.