South African Market:

As you were! Local markets reverted to type this month as recent rallies in the Rand and Resource shares turned around, halted by local politics, S&P’s impending credit rating announcement and global economics. Industrial shares and cash were the only sources of positive returns to be found.

This month’s political own goal came in the way of a report in the Sunday Times that the Hawks want Finance Minister, Pravin Gordhan to be prosecuted for “espionage”?! Although they did come back to refute this and the battle rumbles on, S&P’s decision on South Africa’s credit rating, due on 3 June, is occupying both fund managers’ and clients’ minds alike. In a report by Bloomberg published on 5 May, 12 out of 13 economists and analysts surveyed expect S&P to lower the nation’s rating to non-investment grade by the end of this year. A frequent question being asked of us is if “a ratings downgrade has already been priced into the market?” For the most part, the portfolio managers we have discussed this with believe it has been, and a recent quote from Coronation’s head of Fixed Interest research sums up the general view. He was quoted as saying that “although a downgrade will probably increase volatility, the majority of the bad news seems to be already pretty much in the price”. Time will tell!

The MPC did not change interest rates at this month’s meeting. The Reserve Bank Governor stated that inflation is expected to peak at 7.3% through September and continue to exceed the central bank’s target of 6% until the third quarter of 2017. The general market is expecting a further two 0.25% rate hikes this year.

In the context of global markets, short term investors who are fickle in nature and therefore contribute to the high levels of volatility, now see the prospect of a rate hike in the US as being “sooner rather than later”. The result was a sell-off of emerging markets and resource counters generally. We feel it is also important to highlight this month’s fall in the platinum price, one of the most negatively affected commodity prices this month.

Global Markets:

“Should the United Kingdom remain a member of the European Union or leave the European Union?” This is the question that British citizens will have to answer in a referendum to be held on 23 June.

According to a Goldman Sachs’ client survey the possibility of Britain exiting the European Union (Brexit) is now the largest single concern to global investors – even higher than Donald Trump occupying the White House!? The economic costs and benefits of Brexit cannot be known before the event, and with both sides fear-mongering to the maximum, there is a substantial amount of uncertainty around this topic. The latest poll of polls, carried out by NatCen Social Research, shows that 53 per cent of voters want to stay in the EU and 47 per cent want to leave.

Markets did an about-turn in May. Short term investors, betting on the timing of a US interest rate hike dominated market sentiment, leading to a sharp sell-off in emerging market shares whilst developed markets turned marginally positive. For the most part, expectations this year have been for a delay before the US interest rate hike, however May brought news pointing to a possible rate hike in the next month. In line with this change in sentiment, the US Dollar rallied sharply throughout the month and resource prices declined.

One resource market that has not been affected, is oil which continued its upward trajectory. Brent crude traded above $50 per barrel for the first time since November, however there is speculation that at $50 per barrel, an increase of supply coming on stream is likely, putting an effective lid on the price at these levels.

Finally, Greece was back on the radar this month having met all of the Euro group requirements to unlock the latest bailout payment. Notwithstanding this, the IMF is calling for “unconditional” debt relief for Greece saying that Greece will never be able to meet its debt and deficit targets under the current conditions. This view is beginning to gain some traction. Whilst the tussle continues, the Greek issue appears to be less of a concern to investors than it was a year ago which is a positive development.