South African Market

News flow in June tested the resolve of even the most hardened South African optimists. Not only did we face the horrendous social impact of the Cape storms and fires, but the nation’s political story line continued to amaze. In sympathy, the All Share Index lost 3.5% for the month bringing the return for the first six months of 2017 to a sedentary 1.9%. In last month’s update, we wrote about the increasingly tight personal financial situation South African’s are finding themselves in, as well as the reluctance of business to commit long-term capital in such an uncertain environment. No sooner had the words been written, then Stats SA reported that 1st quarter GDP had contracted by an annualized 0.7%. This followed a 0.3% contraction the previous quarter, meaning South Africa is officially experiencing a recession. To compound matters Moody’s (unsurprisingly) announced that they were downgrading SA’s credit rating by one notch. Just as we had dusted ourselves off from this news, the minister of Mineral Resources, Minister Mosebenzi Zwane, compounded matters with the release of the Mining Charter. This version of the charter proposes constraining mining companies’ ability to function by imposing restrictions on shareholding, income and employment practices. The announcement instantly impacted mining shares, with the resource index losing more than 6% initially, before recovering to end the month down 3.1%. Investec aptly summed up investor views on the topic stating that “South African miners are now uninvestable to a large segment of the market and it will be very tough to attract fresh capital to an already unloved sector”. Perhaps the most surprising and unexpected news to emanate from political circles was the attack on the Reserve Bank by none other than the Public Protector?! The independence of a reserve bank is sacrosanct to investors, and the suggestion that this independence could be undermined is a red flag. Indeed we have already received communication from local fixed income managers indicating as much. The Head of the Reserve Bank, Lesetja Kganyago, summed up the rational view on the matter when he said, “From the moment it [the Public Protector’s findings] was announced, it has had a serious and detrimental effect on the economy and for as long as it remains in place, it holds the risk of causing further Rand deprecation, further ratings downgrades and significant capital outflows.” The impact of this news flow on business sentiment cannot be underestimated. To understand this point one only need look at The Bureau for Economic Research’s data that was released this month. It showed that its business sentiment index was 25% lower for the second quarter of 2017 than the first quarter, and is now at a level that it has not reached since the final quarter of 2009. Whilst civil society will continue to challenge non-sensical and unconstitutional government actions through the courts, we can only hope that the ANC elective conference will deliver some respite to South Africans in December. The Rand deflected this negative newsflow and remained largely unchanged against the US Dollar over the month. In the meantime, we continue to review clients’ onshore and offshore asset allocation to ensure that levels of diversification continue to be appropriate considering the worsening domestic climate.

Global Market

The performance of global equity markets was marginally positive for June bringing the MSCI World Index to its eighth straight month of gains. This is the longest positive streak of the current eight-year bull market. Both US and Euro Zone employment figures as well as other supporting data released this month was largely positive, adding to the positive sentiment around the global economic growth. The US Federal Reserve (the Fed) raised interest rates for the second time this year bringing the Fed’s target rate to 1%. The Fed also announced that it now expects the US economy to grow by 2.2% in 2017, with unemployment of only 4.3%. Inflation however remains below the Fed’s target rate of 2%, something that is expected to pick up given the low unemployment rate and an improving housing market. In her announcement, Janet Yellen provided detail of how the Fed would unwind the $4.5 trillion in bonds that it had bought between 2008 and 2014 to engineer the global economic recovery. Up until now, any proceeds from these bonds by way of interest or repayment of capital, has been used to buy more bonds, effectively keeping the bond market buoyant and interest rates low. Soon the Fed will begin to slowly phase out reinvesting the proceeds as they mature. Janet Yellen has suggested that this “unwinding” of the balance sheet will be “like watching paint dry”. As the final stage of an unprecedented financial experiment it is unlikely that investors will take much comfort in those words, and so we expect much more discussion around this theme over the coming months. Following Theresa May’s loss of a parliamentary majority in the UK election, the impact of Brexit for the UK is now more uncertain than ever. This is finally beginning to show in UK financial markets with the UK FTSE 100 down 2.3% for the month, house prices declining for the first time since 2009 and UK consumer confidence falling markedly. The depreciation of the Pound is now coming through in the UK inflation figures, which is also impacting households. For those with an appetite for risk, this may well be a fantastic opportunity, however it may well be a long and bumpy road ahead. Finally, we note that the oil price lost a further 5% in June despite all the efforts by OPEC over the past 6 months to move the price upward.