South African Market:

N THE AFTERMATH OF LAST MONTH’S EVENTS BOTH THE RAND AND THE STOCK MARKET HAVE HELD UP REMARKABLY WELL. THE RAND ENDED THE MONTH AT R 13.37 AGAINST THE US DOLLAR, AND THE JSE ALL SHARE INDEX WAS UP 3.6% FOR THE MONTH.

Notwithstanding this positive performance, over the long term the downgrade is negative for the economy, our companies and our people. In discussions with clients, the question uppermost on people’s minds is why the Rand remains so strong? One view, is that the downgrade has been priced into our currency for some time, and so no adjustment has happened now that the actual event has taken place. However the performance of the Rand is also impacted by global money flows, so there are always other factors at play too.

Investec’s Jeremy Gardiner puts forward the following reasoning in his recently published article: “Firstly other emerging markets, against whom our behaviour is monitored, like Turkey, are behaving worse, secondly a synchronised global recovery, with the US, China, Japan and Europe all growing, plus a trillion dollar infrastructure boost from the US, has seen commodity currencies back in vogue and finally, emerging market bonds are back in favour after a long period in the investment wilderness”.

Our view, formulated during lengthy debate at this month’s investment committee meeting, is that the risk inherent in the long term future of South Africans has certainly increased. This means that the current Rand strength presents an opportunity for those that should invest more offshore, to do so. On the balance of probabilities it is unlikely that the currency will remain unscathed over the longer term. However, this view has to be balanced with what the money managers tell us which is that the Rand’s fair value approximately R12 to the US Dollar. Furthermore, if Zuma does indeed fall, the negative sentiment could change pretty quickly.

Looking at stock market performance over the longer term, we are still very much in the doldrums locally with the All Share Index having returned 4.5% over the last year, and approximately 7% per annum over the past three years. This lacklustre performance is of course frustrating, however sideways is better than down-ways, which after a long bull run becomes an ever increasing possibility. Added to this, whilst the performance of offshore markets has been great, when these gains are translated into Rands, returns have been negated by the strength of the Rand.

The RSA R186, our ten year bond, is currently yielding approximately 8.7%.

Finally we note that the Davis tax committee is turning its attention to the feasibility of introducing additional forms of wealth tax. We will stay abreast of these developments in conjunction with our tax colleagues at Mazars and update you as and when it is appropriate.

Global Market:

THE FIRST STAGE OF THE FRENCH ELECTIONS HAVE BEEN RECEIVED POSITIVELY BY EUROPEAN MARKETS, WHILST IN THE US, THE OBSESSION WITH TRUMP’S ABILITY TO PASS TAX REFORM CONTINUES TO LEAD MARKET SENTIMENT. 

The French Election, one of this year’s most anticipated events, took place in April. The election takes place over two stages. The first stage was won by Emmanuel Macron with 23.9% of the vote, with anti-euro, far-right candidate Marine Le Pen with 21.4%. This makes Macron the favourite for the second round of elections to be held on 7 May. For investors, the result is good news, highlighted by a rise of more than 2% in the Euro against the US dollar since the result. If the polls are to be believed Macron is the likely candidate to win, meaning no additional disruption to the Euro area at this point in time.

First quarter economic data released this month broadly reflected continued global growth. The International Monetary Fund (IMF) reported in April that it expects the global economy to grow by 3.5% this year, which would be the best performance in five years if it happens. Gradually we are seeing concerns about growth in the more fragile regions of the world – Europe and China – dissipate, as economic conditions improve.

In the US, Trump has announced his much awaited tax plan. It proposes cutting the US individual’s income tax brackets from seven to three (10%, 25% and 35%) and US corporate tax rates from 35% to 15%. Simply stated, the goal is to cut taxes so much and so fast that it leads to immediate economic growth. It is easy to see why the US market has reacted so positively since Trump’s election, but getting the proposal approved is going to be his single biggest challenge. In response to the anticipated announcement the US stock market is once again trading at an all-time high.

The combination of French election results and Trump’s tax plan have driven the MSCI World Index, which represents large and mid-cap company performance across 23 developed countries, to all-time highs. Emerging markets however continue to outperform the developed markets with the MSCI Emerging Markets index up 2% during the month, bringing the return for the year to date to 16.4%.