Global Market

Whilst developed equity markets, measured by the MSCI World Index, rose 1.8% in October, the R/$ exchange rate weakened by 4.2%. The result has been a positive double-whammy, in Rand terms, for offshore exposure in our client’s portfolios.

Commentators cautioning that the US stock market is over-valued, and that its 9-year bull-run is ending, have increased noticeably in the past few months. Using various measures, it does indeed appear to be expensive relative to historical valuations. However, it continues to rise, once again reaching new highs in October, ending the month up 2.3%. The valuation of the US equity market is important as it makes up close to 60% of the MSCI World Index, and as a result is typically the largest single country exposure in globally diversified funds. The reason for the continued rally this month is that US company earnings continue to improve above expectations. During October and November, US companies report their profits for the third quarter and already, nearly 75% of those reporting thus far, have exceeded analyst’s earnings estimates – and so the bull market in US shares continues, and takes with it developed market equity indices. Tech companies including Google, Amazon and Alphabet, lead the pack in terms of sector performance.

Another characteristic of the current global equity markets, is that areas of markets are offering extremely good value, notwithstanding the elevated valuation of the market indices. PSG Asset Management recently reported that “out-of-favour sectors and stocks are extraordinarily cheap relative to popular stocks.” One explanation for this is the growing flow of money into popular passive funds that invest in the shares of an index. This trend is resulting in less money being actively invested in companies that are not large enough to be a material part of the index, yet offer significantly more value than their counterparts in the major indices. As a result, there are a growing number of opportunities for shrewd fund managers in these elevated markets. This once again reinforces our view that a balanced approach to investing is critical, and incorporating different approaches and styles is the most sensible approach.

The European Central Bank has announced that it will continue to support the Eurozone with its purchase of bonds (quantitative easing) until at least September 2018, but will gradually taper this activity starting next year, from the current €60 billion a month to €30 billion. This is unlikely to have an immediate impact on markets, but is another key step in the actions central banks have taken to secure a global recovery from the 2008 financial crisis, and will be watched carefully.

Whilst the noise around Brexit continues to affect sentiment in the UK, consensus is that the Bank of England will increase UK interest rates for the first time in ten years this week. As markets have been expecting this for some time, the £/$ which is now trading at $1.32, has gradually been recovering from its January low of $1.20. The Pound is now down around 10% since pre Brexit levels.

Commodity prices continued to move upward in October with copper rising above $7000/tonne for the first time since 2014, and oil reaching $60 per barrel.

South African Market

Whilst we are overjoyed that the JSE All Share Index is now showing a return of 18% for the year to date, October’s 6.3% rally is bittersweet as it was mostly due to the negative actions of President Zuma and the words of his sidekick, Malusi Gigaba.

President Zuma’s cabinet reshuffle, followed a few days later by Finance Minister, Malusi Gigaba’s interim budget speech, resulted in a sharp sell-off in “SA Inc” as the Rand, bonds, banking and property shares all dropped. However, as the companies making up the majority of the weighting in the JSE All Share Index have foreign earnings, this weakness in the Rand translated into a rise in the share prices of these Rand hedge companies. South African fund managers are generally positioned with maximum offshore exposure, and exposure to local Rand hedge shares, and so domestic portfolios will show material gains in October.

Whilst domestic markets were up, the domestic economy is anything but up. The interim budget speech has heightened the risk of credit rating downgrades when S&P Global and Moodys are set to announce their credit rating reviews on 24th November. The primary concern from the speech was that tax revenue was projected to fall short of the February budget’s estimate‚ by R50.8bn, and as a result the country’s debt is projected to rise beyond the previous forecast of 52% to 60.8% of GDP.

If either S&P Global or Moodys cut their local debt ratings, South Africa’s Rand denominated government debt will no longer be eligible to be in the world’s big global bond indices. Foreign investors who have invested significant funds in our bond market in recent years in the search for higher returns remain a big threat, to the bond market and the Rand, as they are now reported to hold 41% of South Africa’s local-currency bonds.

A downgrade will not come as a surprise to asset managers as they have been valuing bonds for a downgrade scenario, however such an event would surely impact markets nonetheless. The yield on the ten-year bond, which has been trading at a yield of 8.6% last month, reached a high of 9.2% following Gigaba’s speech. The Bond market closed the month down -2.3%.

Following Citbank’s refusal to renew its loan to SAA in October, there is rising concern that South Africa could enter a period where exchange control is tightened and legislation introduced forcing pension funds to invest in state owned assets (prescribed assets). Let us hope these are nothing more than concerns.

For those considering taking funds offshore before year end, we continue to advocate doing this sooner rather than later, as we are approaching a heightened risk environment towards the end of November, through to the ANC conference in mid-December.