Market and Economic Update
Investment Weekly
15 August 2016
MARKET AND ECONOMICS
RESURGENT RAND IN A CHANGING GLOBAL
ENVIRONMENT
By Dave Mohr & Izak Odendaal, Old Mutual Multi-Managers
It was very easy to be pessimistic about South Africa’s future at the end of
on a rate hike. Every time it looked set to go, a string of bad data or market
2015 when the rand collapsed even further after the shock removal of Finance
volatility caused a hesitation. Nobody expects the Fed to hike aggressively
Minister Nene. Many investors wanted to flee local asset classes completely.
over the next year or two and the exact timing of the next move is still
With the benefit of hindsight, that was the worst possible time to go offshore.
uncertain.
As investors we obviously don’t have the benefit of hindsight, but we can
make sure that our risks are appropriately spread and managed and that
our investment decisions are based on the time horizon of a financial plan
and not in reaction to short-term market noise.
Moreover, the difference between December 2015 when the Fed first hiked
and now is that global yields have fallen substantially. For instance, Germany’s
10-year Government bond yield dropped from 0.6% last year to -0.16%.
The equivalent US yield was 2.2% against the current 1.5%, while the Brexit-
The events of the past twelve months are important in understanding the
hit UK 10-year bond fell from 1.9% to 0.6%. Even Italian 10-year Government
recent resurgence of the rand. A year ago the Chinese Government shocked
bonds yields are now trading at 1% from 4% three short years ago. In fact,
global markets with a 1.9% devaluation of the tightly-controlled yuan on 10
there is currently fierce competition with other markets to attract scarce
August 2015. While small by global standards, it was one of the biggest one-
bonds. Last week, the Bank of England struggled to find willing sellers to
day moves in the yuan ever. This set off a chain reaction of large scale volatility
buy bonds as part of its restarted Quantitative Easing programme. This briefly
on world markets for the next few weeks. Commodity prices plunged, equities
sent shorter-dated British Government bond yields into negative territory
were hammered and risk appetite drained. This came against the backdrop
for the first time ever. The search for yield has therefore intensified, and one
of a rapid decline in the inflated prices of mainland Chinese-listed shares
or two Fed hikes over the course of the next year are unlikely to derail it.
and an alarming deterioration of China’s economic data.
Therefore, it is important to put the rand’s recent rally in context: although
Early December 2015 into the first week of January saw a more steady but
it is one of the best performers against the US dollar this year, the rand is
sizable yuan devaluation and a large decline in Chinese foreign exchange
still weak and has not appreciated against the US dollar over any 12-month
reserves, which stoked fears that the yuan would fall even more exporting
period since September 2011. This means that the currency will have to make
deflation to the rest of the world. The rand fell from R12.70 against the US
up a lot of ground to retrace its recent losses. At the start of 2015 the rand
dollar at the beginning of August to a record low of R16.90 in January.
was at R11.56 against the US dollar and its average for the year was R12.80.
It averaged R10.84 in 2014 compared to R15.17 against the US dollar in 2016
Today the market seems to be paying little attention to the yuan that is now
so far. It would probably be a bit of a stretch to get back to 2011, when the
pegged to a basket of currencies rather than just the US dollar. Therefore,
rand was trading at an average of R7.25 against the US dollar, commodity
China’s central bank is allowing the yuan to fluctuate by a slightly wider
prices were still flying and there were no US interest rate hikes in sight.
margin in daily trading. China’s macro data has certainly improved in recent
Nothing is impossible though. With sentiment now favouring emerging
months and concerns over a hard landing have diminished. Its foreign
markets again and commodity prices firming up from historically low levels
exchange reserves have stabilised, easing fears of massive capital flight.
(in real terms), it is no wonder that the rand has done well.
The other big driver of global currency moves over the past year has been
LOCAL GOVERNMENT ELECTION POSITIVE FOR INVESTOR SENTIMENT
the outlook for US interest rates. The US Federal Reserve (Fed) increased
Against this more favourable global backdrop, local politics are supporting
rates in December last year and has indicated more hikes to come. Its most
the rand for the first time in a while. The outcome of the 2016 Local Government
recent forecasts showed an expectation that the Fed funds rate will be around
Elections is positive from an investor’s point of view for a number of reasons.
3% in 2018. However, the Fed has found it really difficult to pull the trigger
Firstly, the election was peaceful and once again well managed by the
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
15 August 2016
MARKET AND ECONOMICS
Independent Electoral Commission. Secondly, voters have shown that they
Unfortunately, the rand does not have a history of settling down at the “right”
are prepared to hold politicians accountable to their communities, especially
level, but has historically had a tendency to over-or undershoot. This makes
in the metro areas. This strengthened South Africa’s democratic credentials
it difficult for investors and businesses to plan ahead.
and bodes well for longer term governance. Thirdly, all parties involved
accepted the outcome of the polls. Lastly, local governments usually have
no influence on macroeconomic policy and it is worth noting that the country’s
two biggest parties both favour fairly conservative economic policies. The
parties with “radical economic transformation” agendas failed to make big
inroads, showing that the risk of a major shift to populist policies seems
limited.
SEARCHING FOR AN EXCHANGE RATE SWEET SPOT
DIVERSIFIED, RATIONAL INVESTING REMAINS KEY
With the global environment changing so much over the past 12 months,
some of last year’s investment strategies are struggling this year. This
underscores the importance of appropriate diversification, since trends can
change quickly and it is impossible to consistently time such turning points
in the markets. It also highlights why you have to stick to a proper financial
plan instead of letting emotions dictate your investment decisions.
CHART 1: RAND AND YUAN AGAINST THE US DOLLAR OVER THE PAST YEAR
From a South African point of view, the ideal scenario is probably that the
rand holds on to its gains but does not appreciate too much. The rand will
18
6.8
substantially lower the inflation trajectory forecast by the South African
17
6.7
Reserve Bank (they are working on an assumption of R15 to the US dollar).
16
This all but removes the need for further rate hikes.
15
6.6
6.5
14
However, we still need a fairly weak rand to maintain the gains in tourism
and exports and support domestic producers competing with importers.
Data from last week underscores this. Local mining production fell by 2.5%
in June from a year ago, but looking over the shorter term, a recovery seems
6.4
13
6.3
12
11
6.2
Jul 15
to be underway. Output increased by 1.9% between May and June and by
Sep 15
Nov 15
Jan 16
Mar 16
SOUTH AFRICA RAND TO US $
May 16
CHINESE YUAN TO US $ (RHS)
Source: Datastream
4.2% in the second quarter. This improvement was mostly driven by a 25%
surge in platinum output during the quarter. Iron ore output increased
marginally, while coal output was flat. Gold output, despite the higher bullion
price, contracted during the quarter.
CHART 2: SOUTH AFRICAN MINING AND MANUFACTURING PRODUCTION INDICES
115
110
Manufacturing production increased by 4.5% in June from a year ago, and
105
by 2% during the second quarter. Production of vehicles and parts in particular
100
had a strong quarter, as this sector is experiencing an export boom (sales
95
of new vehicles in the domestic market are in the doldrums). Mining and
90
manufacturing will therefore make positive contributions to second quarter
85
Gross Domestic Product (GDP) growth. Second quarter GDP figures are likely
80
to be positive, and might even surprise on the upside. At the very least, a
technical recession (two consecutive negative quarters) and its negative
effect on sentiment should be avoided.
Jul 16
Aug 11
Feb 12
Aug 12
Feb 13
Aug 13
MINING PRODUCTION
Feb 14
Aug 14
Feb 15
Aug 15
Feb 16
MANUFACTURING PRODUCTION
Source: StatsSA
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
INDICATORS
15 August 2016
BEST - Wayde van Niekerk smashed the world record
WORST - July US retail sales data disappoint.
to win 400m Olympic gold medal.
Equities - Global
Description
Index
Currency
Index value
Global
MSCI World
US$
1 736.0
Week
1.11%
Month-to-date
0.81%
Year-to-date
United States
S&P 500
US$
2 184.0
0.05%
0.46%
5.87%
4.80%
Europe
MSCI Europe
US$
1 487.0
2.34%
1.16%
-3.32%
-11.33%
Britain
FTSE 100
US$
8 933.0
0.60%
0.43%
-3.90%
-13.97%
Germany
DAX
US$
1 099.0
3.88%
3.29%
12.24%
-2.48%
Japan
Nikkei 225
US$
167.5
5.16%
4.92%
4.92%
1.05%
Emerging Markets
MSCI Emerging Markets
US$
910.0
2.71%
4.24%
15.04%
3.64%
Brazil
MSCI Brazil
US$
1 711.0
2.21%
4.20%
67.09%
26.46%
China
MSCI China
US$
61.2
4.89%
6.49%
3.22%
-8.18%
India
MSCI India
US$
490.2
0.07%
0.86%
7.97%
-2.74%
South Africa
MSCI South Africa
US$
512.0
4.49%
4.28%
29.95%
0.20%
3.58%
1 Year
-0.80%
Equities - South Africa (TR unless indicated otherwise)
Description
Index
Currency
Index value
All Share (Capital Only)
All Share (Capital Index)
Rand
52 807.0
Week
0.88%
Month-to-date
0.02%
Year-to-date
3.94%
1 Year
1.12%
All Share
All Share (Total Return)
Rand
7 199.0
0.88%
0.21%
5.53%
4.12%
TOP 40/Large Caps
Top 40
Rand
6 229.0
0.71%
-0.24%
1.05%
0.94%
Mid Caps
Mid Cap
Rand
16 678.0
1.60%
2.27%
33.56%
23.60%
Small Companies
Small Cap
Rand
20 125.0
2.02%
2.01%
19.10%
8.11%
Resources
Resource 20
Rand
1 928.6
0.26%
1.96%
25.81%
-7.36%
Industrials
Industrial 25
Rand
12 811.0
0.46%
-1.56%
-2.79%
4.75%
Financials
Financial 15
Rand
7 925.0
2.13%
3.31%
4.83%
-7.57%
Listed Property
SA Listed Property
Rand
2 161.7
1.53%
0.08%
13.29%
5.96%
Fixed Interest - Global
Description
Index
Global Government Bonds
Citi Group WGBI
Currency
US$
Index value
936.7
Week
Month-to-date
-2.97%
-1.75%
Year-to-date
7.60%
1 Year
8.92%
Fixed Interest - South Africa
Description
Index
All Bond
BESA ALBI
Currency
Rand
Index value
535.7
Week
1.22%
Month-to-date
1.98%
Year-to-date
14.93%
1 Year
Government Bonds
BESA GOVI
Rand
532.5
1.18%
1.86%
14.26%
7.77%
Corporate Bonds
SB JSE Credit Indices
Rand
161.9
0.51%
-0.48%
-11.86%
-21.12%
Inflation Linked Bonds
BESA CILI
Rand
248.1
0.25%
0.45%
7.29%
6.55%
Cash
STEFI Composite
Rand
346.2
0.14%
0.28%
4.40%
6.99%
7.52%
Commodities
Description
Index
Brent Crude Oil
Brent Crude ICE
Currency
US$
Index value
45.9
Week
3.75%
Month-to-date
6.81%
Year-to-date
27.58%
1 Year
-6.27%
Gold
Gold Spot
US$
1 336.0
0.00%
-1.11%
25.80%
20.47%
Platinum
Platinum Spot
US$
1 117.0
-2.62%
-2.95%
28.24%
13.17%
Currencies
Description
Index
ZAR/Dollar
ZAR/USD
Currency
Rand
ZAR/Pound
ZAR/GBP
ZAR/Euro
ZAR/EUR
Dollar/Euro
USD/EUR
Dollar/Pound
USD/GBP
Dollar/Yen
USD/JPY
Index value
Week
Month-to-date
3.05%
Year-to-date
15.62%
1 Year
13.43
1.85%
-4.85%
Rand
17.17
4.19%
6.46%
34.13%
15.96%
Rand
15.04
1.15%
3.08%
12.99%
-6.16%
US$
1.12
-0.89%
-0.27%
-2.41%
-1.79%
US$
1.29
1.20%
2.20%
14.59%
20.78%
US$
0.01
-1.01%
-1.01%
-16.16%
-19.19%
Source: I-Net, figures as at 12 August 2016
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
15 August 2016
THE WEEK AHEAD
SOUTH AFRICA
•
Retail and wholesale trade sales
US
•
Consumer inflation
•
Housing starts
•
Industrial production
•
Leading economic indicator
EUROPE
•
Germany ZEW Economic Sentiment Index
•
Eurozone trade balance
•
Eurozone core inflation
JAPAN
•
Second quarter GDP
•
Trade balance
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