South African Market:

The All Share Index ended the month down by -0.4% in May taking the return for the year to date to a satisfactory 7.1%; although the local market has still not breached the previous high that it set on 24th April 2015.

The strength of the Rand continued to be the dominant theme last month, reaching a high of R12.88 to the US Dollar on rumours that the ANC’s national executive committee may remove Zuma. This current strength, despite the recent ratings downgrades, is almost certainly attributable to the net buying by foreign investors of R23.2 billion of South African bonds during April and May. This follows the general theme of foreigners investing in emerging markets to buy bonds with higher interest rate yields than can be found in the developed markets. The next foreseeable bump in the road for the Rand is Moodys’ rating announcement which is due any time before July 3rd. If Moody’s downgrade South Africa by another two notches to junk, it is estimated that R100bn in forced sales of South African bonds will be triggered, which will certainly impact the Rand negatively. The Rand therefore remains vulnerable to this prospect as well as changes in global sentiment towards emerging market bonds.

At this month’s MPC meeting, the minister of the Reserve Bank, Lesetja Kganyago, kept interest rates on hold, whilst reducing the Bank’s forecast GDP growth down to 1.0% for 2017. The worsening domestic economic situation was made abundantly clear at a meeting we had with the Deputy Chief Investment Officer of Foord Asset Management last week, Daryll Owen. Daryll explained that in their assessment the latest political events have now effectively “killed off” investment by SA Corporates, and that added to this, the SA consumer is struggling more than ever to make ends meet. Without consumer spending, government expenditure or business investment to drive growth, there is simply no prospect of growth for SA focussed companies at present. This is consistent with how fund managers have positioned their domestic funds, with the majority of the exposure being to SA listed companies with offshore sources of income. With the ANC elective conference to be held in November, business is likely to continue to delay any capital investment until there is more political and economic certainty.

Resource shares declined -4% in May, bringing the return of the resources index for the last 12 months to 0.12%. It appears that the rally in resources that brought value funds strong gains in the first 6 months of 2016 has come to a standstill. The prevailing view is that China now has a large enough stock pile of commodities to last for 3 to 5 years, and as a result demand for commodities will be muted for the foreseeable future.

Finally, it is interesting to note that the latest unit trust performance figures show that the relatively strong returns that value managers delivered during 2016 have also paused, whilst some of 2016’s relative underperforming funds are beginning to pick up again. The value managers believe that the value cycle is far from over, and that this is a pause in a longer term uptick of returns relative to growth funds. Looking at the relative valuations of the two styles, one has to say that this is a compelling view. At WellsFaber we monitor the shifts in manager performance keenly, however our emphasis on diversification ensures our clients have exposure to a spread of investment styles. This ensures that overall portfolio returns are not tied to the cycles of a specific investment style, but diversified across a few of them.

Global Market:

Emmanuel Macron won the final round of the French presidential election by a large margin in May, meaning that we have successfully navigated one of the larger political risks in 2017, and that Europe is now on a sounder footing. Unfortunately Donald Trump remains high on the list of political risks, as he continues to lurch the US unpredictably forwards, or backwards, depending on your view. 

Global equity markets gained further ground in May, as equity markets continued their upward march. The rally has become broad based over the last 12 months, with all major world indices up substantially and emerging markets having joined in. Around 30% of the contribution to the rally in global markets this year has come from technology shares, with the big names of Facebook, Apple, Amazon, Netflix and Google each up between 25% and 33%.

The outlook for global equity tends to remain positive, with the bulls believing that as the rally becomes more broad-based, so the probability of it becoming more sustainable grows. The rally is also supported by the ongoing economic improvement of all the major regions across the globe. On the other hand, there is concern that the earnings growth of US companies which has been particularly fast recently, is not sustainable, which may lead to a pull-back in the US market.

The US Fed’s early-May meeting gave a clear indication that it is on course for another rate hike that is likely to be announced at its next meeting in June. Indications are to expect one or two more hikes, depending on incoming data, during the remainder of the year. These hikes have been clearly signalled to the market, and are therefore not expected to be disruptive to equity markets at this point in time. However, as interest rates normalise further, we would expect a point at which the higher interest rates will attract capital out of equity markets. For this reason we watch this gradual increase in interest rates with interest. Since the global financial crisis, clients with offshore cash have earned a negligible return on cash in the low interest rate environment. Whilst this will persist for some time, indications are that returns on cash will begin to tick up.

We note that the oil price has once again slipped back to below $50 (at the time of writing) which is its lowest level for six months. It seems that US shale industry production is preventing OPEC’s supply cuts from having the desired effect of increasing the price of oil.