Global Market

World markets ticked up again in August whilst volatility remained at all-time lows. This, despite Trump firing a few more recent hires, abandoning his business think tanks (or did they abandon him?) and using twitter to threaten Kim Jong-Un of North Korea. It is no wonder the mighty US Dollar is experiencing a bit of weakness of late.

The MSCI World Index was down -0.1% in August, with the MSCI Emerging Markets Index up 2%. Emerging markets are now up 25% over the last year and developed markets are up 11%. Emerging markets continue to outperform as they have been, and remain, relatively cheaper than developed markets. Furthermore, the improving global economy has a greater impact on emerging market economies. The opposite however is also true as should global growth stall, or should there be a negative market event, emerging markets will feel it most as investors shift assets into safe havens of developed markets.

The US dollar has lost 10% so far this year against a basket of major currencies and this trend continued in August. Most put this weakness down to the cloud of political unpredictability that is Donald Trump. Most notable has been its performance against the Euro, which is now up 13% against the US Dollar since the beginning of the year. This is indicative of the ongoing improvement in the Eurozone, which has also participated in the global growth story, albeit somewhat tentatively. European sentiment continues to improve as Mario Draghi prepares investors for a reduction in quantitative easing, as well as the fact that the big European election risks are now behind us. On 24 September, German elections take place, and right now it looks highly likely that Angela Merkel will win another term in office.

The immediate threat to the low volatility we are currently enjoying is the looming deadline for US Congress to once again raise the federal debt ceiling, which is the limit on how much the Treasury can borrow. If it is not raised, then the US would begin defaulting on its debt. We have been through this a few times in the recent past and although there was plenty of political horse trading right up until the deadline, at the end of the day the ceiling has been raised. This will most likely be the case again, but the Trump factor does add an element of unpredictability this time around. The deadline to raise the ceiling is 29 September.

Finally, the weaker dollar adds more weight to the case for US inflation remaining low, which means that US interest rates are likely to remain low for longer. Janet Yellen has eluded to this and although we may yet see another US rate hike, it seems unlikely at this point that US interest rates will rise enough to see a significant shift of investors out of equities into treasuries.

For now, global markets appear to have the wind at their back.

South African Market

The JSE appears to finally be on the move again, reaching another new high on the 25 August, extending last month’s 7.2% increase by another 2.6% increase and taking us out of a two-and-a-half-year sideways trend.

August’s rally, although broad-based, was once again led by resource companies which were up another 4.4 % for the month. Resource shares have responded to the increasing price of metals such as iron ore, copper, aluminium, zinc, gold, platinum, palladium and rhodium. These prices have been driven by a combination of factors, including: (i) continued global growth (ii) a weaker USD which makes the price of a commodity cheaper in foreign currency and (iii) China cutting the production of certain commodities to contain winter pollution. It’s been fascinating to watch different fund managers’ views playing out as the resource rally continues. As we have pointed out in the past, having a positive investment view on resource companies has been the view of a few, contrarian fund managers, yet the funds with exposure to this sector, continue to be the best performing funds over the past two years.

A slightly more positive picture for the domestic economy is emerging. This should however be viewed in context – remember we are technically in a recession, so any good news is an improvement. The reason for this is that inflation has now fallen back markedly, (4.6% in August), and the Rand has continued to hold steady (R13 to the US Dollar). Added to this the August trade surplus (the amount by which exports exceed imports) of R9 billion, was the highest it has been since 2011, which is supportive of the Rand. These factors give the Reserve Bank room for further interest rate cuts, which consensus says will continue. Lower interest rates help business and consumers alike, however they also have the effect of increasing the intrinsic value of an investment, so this factor may also be adding to the increased returns the JSE is experiencing.

Notwithstanding all of this, the CEO of Woolworths, when reporting results summed up the current sentiment saying “There are some green shoots but they are few and far between. Until we get to mid-December, we are in a hiatus,” eluding to the fact that all eyes are now firmly on the ANC’s December elective conference.