South African Market:
All good things come to those who wait, and if Leo could finally win an oscar, then there is hope that South Africa could avoid the dreaded downgrade after all.
February was a month of turn-arounds firstly led by resource shares and then followed by President Zuma. The most surprising turn-around is what appears to have been a change in President Zuma’s speech writer, as his tone became substantially more market-friendly. Actions though, speak louder than words, as was pointed out to us in a pre-budget workshop with the Investec’s Rates Team. Their message was that a positive tone and a good budget speech will buy time, but action must take place well before December 2016 to avoid a year-end downgrade. What type of action? In the short term Investec want to see board reshuffles at state owned enterprises and the removal of unnecessary uncertainty by signing bills that have been on the table for too long, such as the Minimum Wage Bill and the Mines and Minerals Amendment Bill. In their view, actions like these would support the case for maintaining our credit rating through December 2016, buying time whilst more substantial action is implemented. The budget speech itself was broadly well-received by market commentators with the most interesting news from an advice perspective being the increase in Capital Gains Tax as well as SARS’ offer to provide a six month window from October 2016 for taxpayers to regularise their offshore tax affairs (i.e. declare offshore assets and income!)
The local equity and bond markets ended the month flat, masking a month of volatility for resource and banking shares. Resource shares finally halted their relentless decline with a strong rally led by gold and platinum shares seeing the resource index rise by close to 16% during the month. This provided much needed relief to those fund managers that have been accumulating resource shares through the downturn in the cycle. Whether or not the resources rally is sustainable remains to be seen – most analysts appear to be doubtful.
Inflation figures released this month showed a sharp acceleration, as expected, vindicating the Reserve Bank’s 0.5% interest rate hike last month. We expect this inflation trend to continue.
The changes in valuations of sectors of the equity market and the bond markets over the past two to three months have resulted in fund managers repositioning their portfolios to take advantage of the opportunities that have emerged. In some cases we are seeing views that haven’t been expressed for a long time. For instance Coronation Fund Managers have been steadily increasing their exposure to South African shares in their Balanced Plus Fund, since the sell-off in January, and Aylett & Co began the process of reducing their offshore exposure in their Worldwide Flexible Fund at the start of February.
Global Markets:
In recent months, the performance of equity markets, particularly in the us, has been tied to investor sentiment around the oil price, an indicator of the prospects for global growth. However, the European banking sector stole the limelight in February, a month in which Deutsche Bank reported a loss of €6.8 billion for the year ended December 2015, shares in Credit Suisse traded at 30-year lows and European financial shares in general are down over 30% within the past 6 months. This decline is mostly due to the fear that central banks across the world will push interest rates further into negative territory forcing banks to take losses on their reserves and has begun to take central place in investor concerns.
Markets become fixated on certain topics or themes, which although important, create an inordinate amount of “noise” and hence volatility, in the short term. Two prevalent themes that appear to becoming entrenched in 2016 are (i) whether or not the US economy is growing fast enough to warrant a further increase in interest rates, and (ii) the direction of the oil price. Both are indicators of global growth, and hence important, but markets react daily and sometimes, severely, to the drip-feed of news on both topics. The volatility we have experienced so far this year is likely to continue. The latest developments regarding the oil price is that a Russian-Saudi production freeze agreement is now in place, but the introduction of production cuts appear to have been ruled out. And in terms of US interest rates, Janet Yellen indicated in her latest speech that the chance of a rate hike has not been ruled out and will depend on the progress of the US economy.
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