Global Markets:

Within a month after the Brexit vote, global markets have shaken off the initial damage inflicted by the “remain” outcome, and resumed an upward trajectory. Most markets ended the month higher than they were just before the vote. We fear that this is more to do with the commitments made by the world’s central bankers to support any post Brexit economic slow-down, than investment fundamentals.

An interesting observation is the continued strength in the performance of emerging markets in July. The MSCI World Emerging Markets Index delivered a return of 4% in June, and another 5% in July. Supporting this rally has been another step up in the recovery of commodity prices. Notwithstanding the received wisdom that commodity prices require a resurgent Chinese economy to recover, the platinum price is now up close to 30% thus far in 2016. Furthermore, the “remain” vote, which led to central banks committing to support their respective economies with liquidity, has emboldened investors to take on more risk, resulting in an increased appetite for emerging market assets.

Whilst this ongoing central bank stimulus is a systemic risk we are concerned about, the support it provides to global markets may well continue for some time yet.

July brought with it continued geopolitical turmoil. A Fitch survey of European credit investors conducted last quarter, identified geopolitical risk as the biggest threat to their markets. Needless to say their concerns appear to be justified given this month’s backdrop of Brexit, the Nice attack, Turkey’s thwarted coup, the Munich shooting, the resignation of David Cameron, appointment of Teresa May and the ongoing success of the Trump campaign. Indeed the geopolitical landscape is changing rapidly, and with five more months to go in 2016, it may well turn out to be a defining year in the history of global geopolitics. How this will impact financial markets remains to be seen, and we watch with great interest to see how events unfold and the impact they will have.

Finally, we note that the US Fed kept interest rates on hold once again, notwithstanding the US economy approaching full employment, and a positive US house building number in June.
Interest rate markets are no longer expecting to see a US rate hike this year, after initially indicating there would be two. So much for forecasting!

South African Market:

In line with the rally in emerging markets, the Rand, South African bonds and South African equity markets all had a positive month in July.

The Rand has now strengthened by 10.5% against the US Dollar since the beginning of the year, as well as strengthening relative to a basket of other emerging market currencies over the past two months.

South African bonds are returning to pre-Nenegate yields, with the yield of the 10‑year bond continuing to grind lower, closing the month at 8.6%. This is down from yields in excess of 9.75% in the immediate aftermath of Mr Nene’s removal last year. Although there has been broad consensus that any credit downgrade is “in the price” the ongoing recovery of bond yields and the Rand, leaves us wondering if this will still be the case if the strength in yields and the Rand continues leading up to the next S&P rating announcement in December. On the topic of a downgrade, whilst our State Owned Enterprises continue to be a source of pained amusement, there was some positive news this month with Eskom’s annual results reporting a vastly improved financial position.

The Reserve Bank decided to keep interest rates on hold at this month’s MPC meeting whilst reducing its forecast for growth of the SA economy to zero for 2016. In its announcement it appeared to put a stop to speculation that the next move could possibly be down, by making it clear that it had merely “pressed the pause button”. The Bank’s zero-growth forecast, which is down from 0.6% at the time of the last monetary policy committee meeting in May, is worse even than the IMF’s recent 0.1%. Both the Bank and the IMF expect growth to pick up to just 1.1% in 2017.

Supported by the increase in commodity prices, the South African resource index was up 4.3% in July and 33% so far this year, outperforming both financial and industrial shares since the beginning of 2016.

Finally, we were interested to see how wide the difference in positioning of some of South Africa’s leading balanced funds has become. Both Rezco and Coronation’s balanced funds have track records of top quartile performance over a period of more than 10 years. As at the end of June, Rezco held 60% of its fund’s assets in money market investments – an extremely bearish view. On the other hand, the equivalent fund managed by Coronation held 70% in equities.

We remain staunch advocates of diversifying investments in funds through exposure to fund managers with different investment styles, as this reduces the overall volatility of your portfolio over time.