June 2017 market overview

Globally, the UK general election called by Theresa May to strengthen her majority resulted in a hung parliament. President Macron’s party won an outright majority in the French Parliamentary elections – making it the second successive defeat for nationalist apologists in Europe. Global bonds rallied hard as a result with 10-year Treasury yields reaching a post-Trump low of 2.10%. The ECB left rates unchanged but changed their language saying further rate cuts are off the table. Draghi later in the month opened the ECB forum with a less dovish speech, highlighting a strengthening and broadening recovery through the economic zone, and that the factors that are keeping inflation low are temporary in nature. Oil tumbled during the month on oversupply fears with Brent falling 4.75% to $47.90/barrel after trading as low as $44.40/barrel intra-month.

Locally, all three rating agencies provided updates on the sovereign in June. Fitch affirmed South Africa’s foreign currency and local currency ratings at BB+ with a stable outlook. Moody’s ended the half-year update window with a cut to both the foreign and local currency ratings by one notch to Baa3 and, importantly, kept the outlook on negative watch. It noted the weakening of institutions, reduced growth prospects and the resultant risks to the country’s finances as reasons behind its decision. The consequences of an additional downgrade by either S&P or Moody’s, both with negative outlook are severe as it triggers exclusion from the Bloomberg Barclays Global Aggregate Bond Index. If both agencies downgrade this would further trigger exclusion from the Citi World Government Bond Index.

Economic data was miserable, with Q1 GDP showing a -0.7% quarter-on-quarter contraction from the previous -0.3% in Q4 2016. This puts South Africa in recession for the first time since 2009 following the global financial crisis. Unemployment numbers for Q1 were equally bad, hitting a 14-year high at 27.7%. However, the silver lining was that most of the increase was driven by an increase in labour force participation. The decrease in employment in many industries was related to contracts over the festive season ending. Inflation numbers printed in line with expectations at 5.4% year-on-year with core at 4.8%, affirming the disinflation outlook.

June has been quite muted for South African investors. The FTSE/JSE All Share Index (ALSI) lost 3.49% on a total return basis and the All Bond Index (ALBI) too ended in negative territory (-0.95%). The SA Listed Property Index ended nearly flat for the month at 0.29% and cash returned 0.61%. Internationally, the MSCI World Index gained 0.4% in dollar terms and the MSCI Emerging Markets Index ($) returned 1.04%. For South African investors who measure their gains in rand, the 0.5% appreciation of the rand against the dollar cancelled out most of these international gains.

Year-on-year, up to 30 June 2017, the ALSI and listed property returned a meagre 1.69% and 2.82% respectively. Cash barely beat inflation at 7.63%, and the ALBI gained 7.93. Internationally, the MSCI World Index and the MSCI Emerging Markets Index ($) returned a respectable 18.2% and 22.8% respectively in dollar terms. However, the rand strengthened more than 12% against the US dollar over the past year, reducing much of the offshore portfolio gains.