Market Commentary




3Q19 Market Commentary
By Mila Mafanya – Interim CEO & Head of Equities

Emerging markets succumb to global uncertainty

Following a solid start to the first 2 quarters of the year, global equity markets buckled in the 3rd quarter. Emerging markets bore the brunt of the volatility flare ups triggered by a raft of global uncertainties.

During the month of July, the market was pre-occupied by continuing global growth fears and incoming UK Prime Minister Boris Johnson’s overtures around a no-deal Brexit. As a consequence of rising risk aversion from investors, global bond yields continued to fall with unprecedented stock of global bonds in negative yielding territory and the UK Pound drifting to multi-decade lows.

August proved to be little different from July.  Whilst global growth concerns continued to linger in investors’ minds, markets witnessed an escalation in the US-China trade war with new tariffs imposed on China. These tariffs were swiftly followed by retaliatory trade measures put in place by China. Boris Johnson managed to get the blessing of the Queen of England to suspend the UK parliament into October, which raised the likelihood of a no-deal Brexit outcome. Markets reacted to the heighted uncertainty with global bond yields falling by 29bps to 1.15% with the stock of negative yielding bonds surpassing $17 trillion, whilst emerging market currencies sold off 4.5%. The gold price rallied 7% in the month as the safe-haven allure took hold.

Early in the month of September there was a reversal of the risk aversion that occupied markets in the preceding 2 months, with US government bond yields rising, gold giving back half of the gains from the prior month and a tempering in the tone of US-China trade talks. On 14th September, markets were shaken by a well-orchestrated drone attack that took out half of Saudi-Arabia’s oil production which accounts for 5% of global oil supply. By the end of the month oil prices had retraced back to levels seen at the end of August.

By the end of the quarter, emerging market equities had fallen 5.1% with developed market equities marginally up 0.1%

Broad-based sell off in South Africa

South African (‘SA’) equity markets were bigger casualties of the risk-off sell-off that impacted emerging equity markets, with SA equities falling 13.2% in US dollars (‘$’) over the quarter, as a result of the 6.9% weakening of the Rand/US dollar exchange rate (‘R/$’) over the same period.

Over the quarter, SA equity markets fared better in local terms than its $ performance, with SA capped indices being down 5.1% in Rands. Local equities lagged their fixed income counterparts with cash and bonds delivering returns of 1.8% and 0.8% respectively over the quarter. All 3 of the main SA equity sectors declined over the 3 months, with resources and financials registering the largest losses of 8.4% and 6.8% respectively.

The poor performance of the resources sector over the quarter was driven by declines in specialty chemicals, general miners and the forestry & paper sub-sectors. The Sasol (‘SOL’) share price fell 27.7% as the company announced further delays and cost over-runs on their US Lake Charles Chemical project (‘LCCP’) and a delay in the financial results due to a Board sanctioned investigation into the reasons for the delays and cost-overruns on LCCP. The LCCP issues were further exacerbated by a 7.1% drop in the Brent crude oil price over the quarter, leading to material downgrades in analyst expectations. There was a broad-based sell-off in general miners as iron and copper prices retraced 17.9% and 4.5% in the quarter respectively. Iron exposed names Assore (‘ASR’), Exxaro (‘EXX’) and African Rainbow Minerals (‘ARI’) fell 30.5%, 24.1% and 22.7% respectively. Sappi (‘SAP’) was the standout underperformer within the forestry & paper sub-sector, falling victim to weakness in dissolving wood pulp prices which hit30-year lows along with suppressed environments in other segments within which it operates. Bucking the trend within the resource sector was precious metals which witnessed strong rallies in Northam Platinum (+40.9%), Impala Platinum (+36.6%), Harmony Gold (+36.4%), Sibanye Gold (+25.2%) and Anglogold (+11.8%); spurred on by higher gold and platinum group metal (‘PGM’) basket prices and a weaker R/$.

Financials’ underperformance over the 3-month period was driven by share prices weakness of Intu Properties (‘ITU’), Discovery Holdings (‘DSY’), Investec (‘INP’) and Nedbank (‘NED’). ITU declined 38.6% as Brexit uncertainty intensified, over and above a weak result in late July, where net rental income and net asset value fell more than the market expected. DSY shares dropped 23.5% on the negative impact that the recently published National Health Insurance (‘NHI’) will likely have on private medical schemes and growing concerns over its aggressive accounting practices compared to local insurance peers. INP fell 13.7% following a disappointing trading update in late September which cited weakness in the UK Specialist Bank business ahead of the separation of the bank and asset management units in early 2020. Nedbank shares retraced 10.4% as investors grew increasingly concerned about Nedbank’s comparatively, larger exposure to a weak local property sector in its Corporate & Investment Banking unit.

The industrial index’s decline of 2.5% was attributable to share price drops by Massmart Holdings (‘MSM’), Telkom (‘TKG’) and Shoprite Holdings (‘SHP’). MSM lost 29.5% of its value as it reported losses for its first half results and US retailer Walmart, who owns a large stake in MSM, showed the first signs of active ownership with the appointment of a Walmart executive as the incoming MSM Chief Executive Officer. The TKG share price retraced 23.4% following a 26.4% rise in the second quarter which was catalyzed by its mobile business reaching profitability and investor enthusiasm surrounding the potential sale of its property portfolio. SHP declined 22.2% as the company delivered a poor set of results which exposed the extent of losses in its African division after almost 2 decades of investment. The top performer amongst industrial shares was Pioneer Foods (‘PFG’) which rallied 53.6% following the announcement of a handsome buy-out offer by PespiCo in July which is likely to go through given the extent of irrevocable support from shareholders. Offshore defensive shares British American Tobacco (‘BTI’) and Mediclinic International (‘MEI’) benefited from the weak Rand exchange rate with the respective share prices advancing 13.7% and 13.2%. Woolworths Holding’s (‘WHL’) share price increased 12.7% following results which showed a revival in the SA clothing business and robust performance from the SA food business which overshadowed the woes of its Australian David Jones asset.