August 2016 market overview

August brought some good news for investors in South African assets. The local business confidence index rose to 96.0 from 95.1 in June, lifted by a firmer rand during July and improvements in export volumes and retail sales. CPI decelerated from 6.3% y/y in June to 6.0% in July, with provincial annual inflation rates ranging from 4.8% in Northern Cape to 7.9% in Limpopo. Although SA’s trade surplus declined to R5.22bn in July from June’s revised surplus of R12.47bn, the country’s m/m exports have been exceeding its imports since April this year. This improvement reflects the favourable influence of the weak rand on trade and also suggests the current account deficit is shrinking.

Casting a shadow over the good data being released, were continued reports of Minister Gordhan’s possible arrest, as well as changes in the government structure overseeing state-owned enterprises (SOEs). In the light of these changes, Futuregrowth suspended further loans to Eskom, Transnet, Sanral, Landbank, IDC and DBSA, awaiting clarity around the authority of National Treasury to make financial decisions on these SOEs.

Elsewhere in Africa Nigeria’s GDP shrunk by 2.06% in Q2, officially marking a recession. Its non-oil sector fell due to a weaker currency while lower oil prices were dragging down the oil sector. It is currently contested whether South Africa or Nigeria is the nr 1 economy in Africa in terms of GDP in dollar terms, as both economies experience high levels of volatility in their currencies relative to the dollar.

Internationally, eyes remained on the UK. The Bank of England cut interest rates and re-launched bond purchases to mitigate the potentially negative impact of the Brexit decision on markets and the British economy. The pound touched 87.03 pence per euro, the weakest level in three years but, on the positive side, UK house prices rose 0.6% from July and are now up 5.6% compared to a year ago.  In addition, the UK Economic Sentiment Indicator rose to 104.0 from 102.6, recouping some of the ground lost in July, but remaining below pre-June levels.

Across the channel the EU agreed to cancel the fines for Spain and Portugal after these states failed to meet their budget targets. The waivers follow a similar decision last year when France missed its deficit targets, raising questions around the EU’s ability to rein in fiscal spending.

And in the US, markets are watching every move of Janet Yellen for a sign that September might be the month that US interest rates are lifted, especially since she stated at Jackson Hole that ‘the case for an increase in the federal funds rate has strengthened in recent months’.

During August the FTSE/JSE All Share Index (ALSI) gained a mere 0.27% on a total return basis. But with the 5.6% depreciation of the rand against the dollar during the month, dollar investors in the ALSI would have experienced a loss of 5.3% for August. The All Bond Index (ALBI) and inflation-linked bonds returned -1.77% and -0.46% respectively this month. Cash returned 0.62%. On the global front, the MSCI World Index ($) eked out a mere 0.08%, while the MSCI Emerging Markets Index ($) delivered 2.5% on a total return basis (USD). Year to date the ALSI return now stands at 5.8%, outperforming cash’s 4.8%, while the ALBI has delivered a stellar YTD return of 11.7%.

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