South African Market:

Notable themes impacting the South African market in July were the continued weakness of the Rand, as well as the ongoing rout in the resources sector which has lost 40% in the last year. Resources shares are testing the resolve of the value investors who see long term value in the sector, but are suffering underperformance whilst waiting for the sector to turn. Whilst this may well turn out to be a generational investment opportunity, it is another reminder of how difficult it can be to be a contrarian investor. The property sector and bonds returned to winning ways in June, after a few months of negative returns, although we note that bonds have still underperformed cash over the last 12 months.

Global Markets:

Emerging Markets broadly continued to underperform in absolute terms having now returned -15.7% over the past 12 months. This performance has created a drag on the performance of the local manager’s with explicit exposure to emerging markets in their funds, such as Coronation Market Plus Fund. The S&P continued its strong performance which has been led by tech and biotech stocks, leading some to wonder if we are once again witnessing another bubble in tech – with Uber’s latest valuation of $50 billion we would hazard a guess and say, yes, it looks like a bubble! Asian markets, specifically China and Japan have been the strongest performers over 12 months being up 69% and 32% respectively. The Prescient Absolute Balanced Fund is the only South African fund manager we are aware of with a substantial exposure to China in its fund and Prescient have invested heavily in a dedicated China investment team over the past year.

South African Macro Economics:

South Africa’s trade deficit has been positive for 2 months in a row now which is welcome news. Notwithstanding this the Rand continued to weaken during the month reaching nearly R20 to the GB Pound. There has been broad based weakness in emerging market currencies during the year and the Rand has been exposed to this weakness as well as the domestic headwinds that it faces. The MPC raised interest rates by 0.25% this month, having decided that containing inflation is of greater importance than the impact of the higher interest rates on the economy. Inflation remains relatively low at 4.7% but is expected to move gradually back towards the SARB’s upper threshold of 6% over the next few months.

Global Macro:

This month’s news was dominated by the Greek bailout, slowing Chinese growth, weak commodity prices, continued strength of the US Dollar, and weakness of emerging market currencies. The strong dollar and weak commodity prices are two sides of the same coin and there appears to be no end in sight for either as Janet Yellen appears determined that the first increase in US interest rate since before the financial crisis will happen in September. We remain circumspect, as although US growth is on track, it is far from spectacular. China continues to produce statistics that point to a continued slow-down, which has been compounded by a huge collapse in in its stock market since the peak reached in June of this year.