July 2016 market overview

The outlook for the South African economy remained glum during the month of July. The most worrying data came from the SA Reserve Bank (SARB), as it revised its growth forecast for 2016 down to 0%. Needless to say, this is much less than the country needs to alleviate persistent unemployment and deflect a downgrade by ratings agencies. Fitch followed the same logic and promptly downgraded its SA local-currency debt rating to bring it in line with its foreign-currency rating – one notch above junk. With this no- to negative-growth outlook, the SARB decided to keep rates on hold despite PPI printing at 6.8% year-on-year for June and CPI at 6.3%, breaching the SARB’s upper limit.

South African businesses are clearly under pressure. Statistics SA has revealed that the average profit margin for the SA formal business sector has declined, from 9c to every rand between June 2006 and September 2008, the good-time years before the Great Financial Crisis, to 5c to every rand between December 2013 and March 2016. The United Nations Conference on Trade and Development also reported that foreign direct investment into SA has dropped by 69% to $1.8bn, its lowest level in 10 years.

Internationally, in the wake of the Brexit outcome, the markets closely watched the data coming out of the UK. The Bank of England announced that it would keep rates on hold, but it is likely that it might provide stimulus in the near future. UK unemployment fell to 4.9%, the lowest level since the third quarter of 2005, which creates a firm foundation for the new independent Britain. But UK retail sales dropped by 0.9% in June.

July was a bumper month for most world markets, as well as for the South African rand. The FTSE/JSE All Share Index (ALSI) gained 1.2% on a total return basis. With the 6.4% appreciation of the rand against the dollar and 6.1% against the pound during the month, dollar investors in the ALSI experienced a gain of 7.7% and pound investors 7.3% for July. The All Bond Index (ALBI) and inflation-linked bonds returned 2.23% and -0.04% respectively this month. Cash returned 0.62%. On the global front, the MSCI World Index and MSCI Emerging Markets Index returned 4.2% and 5.1% respectively for July on a total return basis (USD).

Year to date the ALSI return now stands at 5.5%, driven mainly by Basic Materials (+31.2% YTD) and Industrials (+19.4% YTD), while Consumer Goods suffered a 9.78% negative return for the seven months to 31 July. But it’s bonds that have been the star so far, with the ALBI displaying a YTD return of 13.7%. Emerging markets are not far behind at 11.9% in dollar terms.

Source: Stats SA, I-Net, Bloomberg, Deutsche Bank and Sanlam Investments | One-month total returns up to 31 July 2016