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Market and Economic Update
Investment Weekly
3 April 2017
MARKET AND ECONOMICS
HEIGHTENED POLITICAL UNCERTAINTY AS GORDHAN GOES
Dave Mohr and Izak Odendaal, Old Mutual Multi-Managers
It was a week of high drama, which culminated in the removal of Finance
CHANGES IN POLICY, NOT INDIVIDUALS COUNT
Minister Pravin Gordhan, his deputy Mcebisi Jonas, and other ministers and
The risk of South Africa losing its investment grade credit rating from at least
deputy ministers on Thursday night. Gordhan’s removal was not entirely
one of the three major agencies has now increased. Moody’s has South Africa
unexpected but the timing was a surprise. This must be seen in the context of
two notches above “junk” status (Fitch and S&P Global are one notch above
the ANC’s leadership contest later this year. Until that is settled, political
junk) and is scheduled to deliver a review this Friday. Global markets have
uncertainty is likely to remain. Malusi Gigaba, a long-time Cabinet member,
long priced South Africa as a junk status; with our credit default swaps (CDS)
will now be the fourth Finance Minister since December 2015.
trading in the same region as Brazil, Turkey and Russia (and well above other
RAND PULLED BACK
BBB- countries).
The rand started last week on the front foot. Before the news broke that
It’s not about who the finance minister is but whether fiscal policy changes.
Gordhan and Jonas had been recalled from their overseas roadshow, the rand
A key test will be whether Gigaba retains the commitment to stabilising
hit a 20-month high of R12.31 per dollar. It ended the week at R13.41 per dollar,
government’s debt burden around 50.0% of GDP (a level that is fairly low by
a decline of almost 8.0%, but perhaps not as bad as many feared. Bank shares
global standards). With global growth improving, the cycle of downgrades that
were pummelled on Friday but the JSE All Share Index ended the week up
affected many sovereign and corporate borrowers could turn, potentially also
slightly.
supporting South Africa’s rating. Also helping is the improvement in South
The global context is very different to when former Finance Minister Nhlanhla
Nene was fired in December 2015. With hindsight, the timing of that event
could not have been worse, as global investors were already extremely
pessimistic about emerging markets and commodity prices were close to
multi-decade lows (certainly in real terms). The US dollar was at its strongest
Africa’s current account deficit during the course of last year. Trade numbers
released on Friday show a further improvement in the trade balance, with the
deficit for the first two months of the year at R6 billion compared to
R23 billion in the same period in 2016. Exports grew 7.0%, while imports fell
3.7%.
level in 13 years as the Federal Reserve was about to embark on an interest
Although the public tend to focus on the exchange rate reaction to political
rate hiking cycle for the first time in a decade. All these factors have improved
events, what really matters in the long term is the bond market response.
from the rand’s point of view: emerging markets are back in favour as economic
After all, a weaker rand benefits large segments of the economy and the JSE.
growth picks up, commodity prices have rebounded somewhat from bombed-
But weaker bonds (higher bond yields) imply that government and the private
out levels and the US dollar appears to have peaked as only gradual interest
sector will have to pay more for borrowing or rolling over debt in the future
rate hikes are expected.
(this does not apply to previously issued fixed-rate debt).
The Reserve Bank was forced to hike interest rates soon after Nene was removed,
The yield on the government’s benchmark R186 bond increased from 8.4%
compounding the economy’s growth decline. However, last week the Reserve
last Monday to 8.8% on Friday, not as dramatic an increase, all things
Bank’s Monetary Policy Committee (MPC) left rates unchanged, and noted
considered. Since the government already spends around R160 billion per
that it “may” have reached the end of the hiking cycle. Despite its recent
year on interest payments on its total issued debt of R2.2 trillion it cannot
volatility, the rand has strengthened over the last 14 months and the inflation
ignore financial markets. When you owe that much money, your creditors will
outlook improved (the rand-dollar exchange rate was R13.60 at the time of
impose discipline on you one way or another, irrespective of who the finance
the MPC meeting in January). The Reserve Bank expects inflation to average
5.9%, down from its previous forecast of 6.2%, while the 2018 forecast has
minister is.
been lowered to 5.4%. The local growth outlook has also been upgraded, from
NOT THE TIME TO PANIC
last year’s 0.3% to 1.2% for this year rising to 2.0% by 2019. While the MPC
Investors are becoming used to political shocks in recent times. The United
seems to be backing away from its long-held view that US rate hikes would
Kingdom giving formal notice of its intention to leave the European Union was
be bad for the rand, the latest political uncertainty precludes rate cuts in the
the other big story of the week. The lesson from the Brexit referendum and
short term. However, the slowdown in credit growth – to only 5.0% year-on-
the US election is clear: don’t make knee-jerk portfolio changes, because the
year in February – argues for rate cuts.
market does not always react as expected.
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
3 April 2017
MARKET AND ECONOMICS
Such events always evoke strong emotions, even among seasoned investment
professionals. But making investment decisions based on emotions is almost
always the wrong thing to do. One of the reasons we like team-based asset
managers (and operate in a team-based environment ourselves) is that team
members can encourage one another to remain focused and assess things
rationally. We urge clients to do the same and refrain from making reflex
investment decisions in response to developments that have probably not
played out fully.
CHART 1: RAND – US DOLLAR EXCHANGE RATE AND SOUTH AFRICAN GOVERNMENT BOND
YIELD
18
17
9.5
14
9.0
13
feel safer fleeing to cash or taking all your assets offshore but such concentrated,
11
10
Mar
15
10.5
10.0
15
12
STRATEGY FUNDS WELL POSITIONED TO DEAL WITH UNCERTAINTY
R186 Government Bond Yield % (Rhs)
16
The best defence against uncertainty is appropriate diversification. It might
fearful portfolios typically do not deliver the desired outcome over time.
11.0
South Africa Rand Per US Dollar
Nene fired
8.5
Gordhan fired
May
15
Jul
15
Sep
15
Nov
15
Jan
16
Mar
16
May
16
Jul
16
Sep
16
Nov
16
8.0
Jan
17
7.5
Mar
17
Source: Datastream
Our Strategy Funds are well diversified and have the maximum offshore
allocation allowed by Regulation 28. This portion of the portfolio benefits from
a weaker rand. A weaker rand benefits around more than half of the JSE, so
our local equity allocation also offers substantial currency diversification. Local
bond yields remain attractive relative to expected inflation and the long-term
average yield. Therefore, our funds are well positioned to deal with these
uncertainties.
CHART 2: SOUTH AFRICAN RESERVE BANK’S EVOLVING GROWTH FORECAST (AT THE TIME OF
EACH MPC MEETING)
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
GDP Forecast 2015
1.0%
GDP Forecast 2016
0.5%
GDP Forecast 2017
GDP Forecast 2018
0.0%
Sep
13
Dec
13
Mar
14
Jun
14
Sep
14
Dec
14
Mar
15
Jun
15
Sep
15
Dec
15
Mar
16
Jun
16
Sep
16
Dec
16
Mar
17
Source: SA Reserve Bank
CHART 3: SOUTH AFRICAN RESERVE BANK’S INFLATION FORECAST
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
Sep
13
Inflation Forecast 2015
Inflation Forecast 2016
Inflation Forecast 2017
Inflation Forecast 2018
Dec
13
Mar
14
Jun
14
Sep
14
Dec
14
Mar
15
Jun
15
Sep
15
Dec
15
Mar
16
Jun
16
Sep
16
Dec
16
Mar
17
Source: SA Reserve Bank
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
3 April 2017
INDICATORS
Equities - Global
Description
Index
Currency
Index value
Global
MSCI World
US$
1 854.0
Week
0.43%
Month-to-date
0.82%
Year-to-date
5.88%
1 Year
12.16%
United States
S&P 500
US$
2 363.0
0.81%
-0.04%
5.54%
14.49%
Europe
MSCI Europe
US$
1 570.0
0.19%
3.63%
6.73%
5.72%
Britain
FTSE 100
US$
9 137.0
-0.16%
1.62%
3.69%
2.48%
Germany
DAX
US$
1 198.0
1.01%
5.09%
8.69%
14.75%
Japan
Nikkei 225
US$
168.3
-2.92%
17.39%
17.39%
12.03%
Emerging Markets
MSCI Emerging Markets
US$
958.0
-1.14%
2.35%
11.14%
14.87%
Brazil
MSCI Brazil
US$
1 835.0
-0.16%
-4.58%
9.75%
37.87%
China
MSCI China
US$
66.1
-1.30%
2.12%
12.91%
17.34%
India
MSCI India
US$
521.3
1.53%
5.74%
16.62%
17.41%
South Africa
MSCI South Africa
US$
470.0
-8.74%
-1.05%
3.52%
6.33%
Equities - South Africa (TR unless indicated otherwise)
Description
Index
Currency
Index value
Week
All Share (Capital Only)
All Share (Capital Index)
Rand
52 056.0
0.46%
Month-to-date
1.78%
All Share
All Share (Total Return)
Rand
7 250.0
0.69%
TOP 40/Large Caps
Top 40
Rand
6 288.0
1.37%
Mid Caps
Mid Cap
Rand
15 989.0
-2.55%
Year-to-date
1 Year
2.77%
-0.84%
2.68%
3.78%
2.06%
3.30%
3.90%
0.11%
-0.12%
1.13%
8.25%
Small Companies
Small Cap
Rand
21 347.0
-0.95%
0.16%
4.54%
13.94%
Resources
Resource 20
Rand
1 995.6
5.96%
3.34%
1.93%
13.65%
Industrials
Industrial 25
Rand
12 911.0
1.35%
4.66%
7.12%
-1.73%
Financials
Financial 15
Rand
7 653.0
-4.62%
-0.87%
-1.93%
-3.16%
Listed Property
SA Listed Property
Rand
2 131.9
-2.74%
0.09%
1.37%
1.13%
Fixed Interest - Global
Description
Index
Global Government Bonds
Citi Group WGBI
Currency
US$
Index value
904.1
Week
Month-to-date
0.49%
2.24%
Year-to-date
3.78%
1 Year
-2.01%
Fixed Interest - South Africa
Description
Index
All Bond
BESA ALBI
Currency
Rand
Index value
546.6
Week
-3.22%
Month-to-date
0.40%
Year-to-date
2.49%
1 Year
Government Bonds
BESA GOVI
Rand
544.7
-3.22%
0.44%
2.52%
11.18%
Corporate Bonds
SB JSE Credit Indices
Rand
144.4
-1.81%
-1.75%
-0.12%
-18.51%
Inflation Linked Bonds
BESA CILI
Rand
244.3
-2.38%
-2.15%
-0.53%
3.43%
Cash
STEFI Composite
Rand
362.8
0.14%
0.63%
1.86%
7.58%
11.37%
Commodities
Description
Index
Brent Crude Oil
Brent Crude ICE
Currency
US$
Index value
53.1
Week
Month-to-date
Gold
Gold Spot
US$
1 256.0
0.88%
0.56%
9.12%
2.53%
Platinum
Platinum Spot
US$
948.0
-1.66%
-7.33%
4.98%
-1.46%
4.22%
-5.12%
Year-to-date
-6.79%
1 Year
32.83%
Currencies
Description
Index
ZAR/Dollar
ZAR/USD
Currency
Rand
Index value
13.44
Week
-7.60%
Month-to-date
-2.32%
Year-to-date
1.85%
1 Year
10.85%
ZAR/Pound
ZAR/GBP
Rand
16.78
-8.70%
-3.16%
-0.48%
27.77%
ZAR/Euro
ZAR/EUR
Rand
14.37
-6.54%
-3.41%
0.49%
17.61%
Dollar/Euro
USD/EUR
US$
1.07
0.93%
-1.21%
-1.68%
5.61%
Dollar/Pound
USD/GBP
US$
1.25
-0.02%
-0.62%
-1.42%
15.41%
Dollar/Yen
USD/JPY
US$
0.01
1.12%
-1.12%
-3.37%
0.00%
Source: I-Net, figures as at 31 March 2017
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
3 April 2017
THE WEEK AHEAD
SOUTH AFRICA
•
Absa manufacturing purchasing managers’ index (PMI)
•
Standard Bank PMI
•
Naamsa new vehicle sales
•
Moody’s scheduled credit rating review
USA
•
ISM manufacturing and services indices
•
Vehicle sales
•
Trade balance
•
Non-farm payrolls and unemployment rate
EUROPE
•
Eurozone unemployment
•
Eurozone retail sales
•
Eurozone Composite PMI
CHINA
•
Manufacturing PMI
The Old Mutual Wealth Investment Note is published on a weekly basis to keep our clients and financial planners informed of what is happening in financial
markets and the economy and to share our insights. Markets are often very volatile in the short term and similarly, economic data releases or central bank
actions may cause concerns for investors. This does not mean that investors should take action based on the most recent events. It is better to be disciplined
and remain invested in well-diversified portfolios that are designed to achieve long-term objectives. Our Strategy Funds are actively managed, with asset
allocation changes based on valuations and in anticipation of future real returns, and not in response to the most recent market noise. The future is always
uncertain and that is why our Strategy Funds are diversified and managed with a long-term focus.
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Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)