South African Market:

Zuma’s brazen cabinet reshuffle has tipped the scale from the political tension we south africans are accustomed to living with, into fear. The immediate fallout was yesterday’s announcement that s&p have downgraded our foreign debt to junk status. We have entered a period of heightened political and economic uncertainty.

So much opinion has been published in the last few days about the cabinet reshuffle that adding our two cents to the mix would be trite. Suffice to say that we share the concerns about the appointment of Zuma’s acolytes to facilitate the deals that will enrich him and his patronage network.

Local markets have reacted negatively, albeit somewhat less aggressively than we would have expected.  Prior to the announcement, the Rand had traded at R12.43 to the US Dollar and R15.51 to the Pound. At the time of writing the Rand had weakened to R13.77 to the US Dollar and R17.20 to the Pound. The 10 year (R186) bond yield which had traded as low as 8.25% last month touched a high of 9%. On the JSE, the banking shares have been the most affected with Nedbank, Barclays Africa Group, Standard Bank and PSG Bank all losing between 5% and 8% on the day after the announcement, whilst Rand hedge shares rallied.

Notwithstanding these developments, the first quarter of 2017 has seen the All Share Index rise 2.5%, however over a 12 month period the index remains flat. Most gains this quarter were made by industrial companies, with the financial sector being the largest detractor for reasons mentioned above. Whilst the uncertainty prevails, the Rand and interest-rate sensitive assets like bonds, financial shares and listed property are likely to remain under pressure. Much fund manager commentary last year held the view that a downgrade was already priced into our currency and bond market, however both markets have strengthened materially since the second half of last year, so we expect some weakness in these markets in reaction to the downgrade announcement.

Although we sound like “stuck records” to some, our obsession with managing risk through diversification is our greatest source of comfort during times of volatility. The offshore exposure our clients have buffers portfolios against political risk and the consequent Rand fall out. Investing with fund managers that have an ability to invest across the asset classes, means that we entrust fund managers with the skills to construct a portfolio in a way that is cognisant of the political risk in the market, thereby providing a buffer against it.

Although we are well aware of these political events and the consequent risk, times of fear and uncertainty also bring opportunity, so we will remain objective and vigilant in our outlook. We continue to stay close to the partners we have trusted to manage our clients assets, and to look for any opportunities to reduce risk or reposition portfolios due to irrational over reactions in the local markets.

Global Market:

Whilst the global macroeconomic picture continues to gradually improve, politics dominates investor concerns. This month Trump failed to repeal and replace Obamacare, the Dutch election took place and the 2-year countdown to Brexit was formally announced. 

Economic growth and inflation are both picking up in the Eurozone. Economic sentiment is at a six-year high, trade is improving, and unemployment is now at its lowest since 2009. In addition the Dutch avoided electing the anti-EU candidate Mr Geert Wilders in its parliamentary elections. This means the EU has survived the first of two high risk events. The second is the French election which is to be held across two rounds on 23 April and 7 May. The risk to the status quo is that anti-EU candidate, Marine Le Pen wins and takes France out of the Eurozone. So although the economic sentiment around Europe is positive on balance, the recovery remains “fragile”.

In the US, the normalisation of interest rates continued as Janet Yellen announced the second interest rate increase in three months. The Fed Funds Rate target is now 0.75% to 1.00% and markets have priced in another two rate hikes this year. The Fed Funds Rate is still very low in historical terms. To put this in context the rate was 5.25% in June 2006. During the financial crisis, the rate fell to near zero in December 2008 and remained in a range of 0%–0.25% until 2015. So there is still a long way to go until rates are considered normal, and this will largely be determined by the pace and extent of the economic recovery of the US.

The Trump trade saw its first sign of a wobble this month as the S&P Index ended the month down ‑0.5%. As we explained in last month’s update, the US market has rallied since Trump’s election as a result of the positive sentiment around his domestic policies. However, some doubt has now been cast over his ability to implement these policies. Trump was forced to withdraw his first attempt to implement a policy – the repeal and replacement of the Affordable Care Act (“Obamacare”) – due to a lack of support within his own party! This raises the obvious question of whether or not Trump can make good on his other promises — tax reform, a border wall and investment in infrastructure – which the markets are still betting that he can achieve, but with increased scepticism.

The 2-year Brexit rollercoaster ride has formally begun! Theresa May triggered the country’s departure from the EU on 29 March. According to Pimco, one of the world’s largest bond managers, the risk of a hard Brexit remains high. Pimco expect the most critical period for the negotiations to be in the second half of 2017 and early 2018, so it is then that we expect the news flow to begin to affect markets either positively or negatively depending on the outcomes.

Notwithstanding the politics, emerging markets continued to rally this month returning 2.3% for the month against the developed markets which returned a more pedestrian 0.8%.