Both offshore equities and bonds rose during February in USD, with equities continuing to benefit from an improving economic backdrop. While offshore equities rose marginally in rand terms, bonds declined due to a stronger rand. The Bank of Japan (BoJ), despite weaker consumer spending, increased growth expectations for the next two years on the back of booming factory output and strong external demand for exports. As a result, the BoJ left its policy rate unchanged, sending the 10- year Japanese government bond yield to its highest level in the past twelve months. As expected, the Bank of England kept interest rates on hold at 0.25% and left its asset purchase programme unchanged, but expects the UK economy to grow by 2% in 2017. The bill relating to the triggering of Article 50 has passed the House of Commons and is expected to pass in the House of Lords, enabling Article 50 to be triggered in March. This allows the UK to officially begin negotiations with the EU regarding their future relationship. The US Federal Reserve started the month with broadly neutral messages, which increased the probability of an interest rate hike to 30% and later to 80% on the back of positive economic data and market sentiment. Federal Reserve Chair Janet Yellen’s testimony in front of the US congress provided a strong signal that the Fed is ready to hike rates, where she highlighted strong labour market conditions, rising inflationary pressures, and her support for President Donald Trump’s executive order on financial regulation and the potential for higher growth given his fiscal stimulus plans. Consequently rates were increased on 15 March by 25bp taking the rate to a target range of 0.75 percent to one percent. Continuing the strong inflationary pressures building around the world, emerging markets benefitted once again, closing higher for the month. India’s GDP growth came in higher than expected at 7%, particularly during the period of their demonetarisation drive, making it the world’s fastest-growing large economy.
Locally, SA’s 2016 annual GDP registered in slightly below expectations, growing a meagre 0.3%. The growth in Q4 2016 contracted to -0.3% q/q. The contraction can mainly be attributed to constituents of the primary sector, agriculture and mining, each having shrunk 7.8% and 4.7% respectively, on an annual basis. The manufacturing and construction sectors both grew at an annual rate of 0.7%. However, on a net basis, they added nothing to the growth of the economy as utilities contracted 3.5%. Therefore, growth in the tertiary sector was the saving grace for SA to register a positive GDP result, with the finance, real estate and business services sector expanding 1.9% over the year. This was followed by a 1.2% expansion in the retail sector. SA’s equity market had an inverse performance in February compared to January, with the JSE All Share index down 3.11% on a total return basis. The losses were largely attributed to an overall fall (-1.34%) in commodity prices in February with resources plunging 9.91%. SA’s fixed income market had impressive gains over the month relative to the local equities. On a positive note for the country, the 2016/17 agricultural season has turned out to be excellent for the industry after last year’s devastating drought, thanks to the good rains across the producing areas. Both pastures and cultivated crops are currently in excellent condition with the exception of the Western Cape, where strict water restrictions are in place, and some parts of the Eastern Cape. According to analysts, indications are that the 2016/17 season will end on an excellent note for the grain, horticulture and livestock sectors.
Developed market equities (+2.58% in USD and +0.02% in ZAR) underperformed emerging market equities (+2.99% in USD and +0.41% in ZAR) in February 2017. Developed market property turned in a strong performance of 2.93% in USD terms, while local investors would have experienced a muted return of 0.36% due to the rand strengthening against the US dollar (-2.50%). Meanwhile, global bonds underperformed global equities, adding 0.47% in USD, while losing 2.04% in ZAR. Locally, the ALSI reversed its gains from the previous month turning in a weak performance, returning -3.11% (-0.63% in USD) during the month of February. This weak performance was largely due to the poor performance of Resources (-9.91%), SA Industrials – which includes dual-listed companies (-1.57%) - and the SA Listed Property Sector (-0.36%). It seems that the sectors that performed well in January dragged the markets down during February. Retailers (+1.96%), Industrials (+0.73%) and Financials (+0.24%) contributed positively to market performance. Fixed interest returns were impressive relative to local equities with the ALBI returning 0.71%. Preference shares gave up 1.16% for the month. Over a rolling one-year period, bonds was the best performing asset class (+13.50%), followed by the SA Listed Property Sector, which delivered +10.96%. The shorter end of the yield curve (three - seven years) was the best performing fixed interest asset class in February, returning 1.29%, followed by the very short end of the yield curve (one – three years) which delivered +1.08%. The longer end of the yield curve, over 12 years, was the worst performer, returning +0.49%. Cash underperformed the ALBI, but outperformed the ALSI in February, returning +0.57%. ILB’s delivered a negative 0.07%.
Source: I-Net - 1 March 2017
South Africa’s annual headline inflation rose again in January to 6.6% y/y, showing a slight downtick from 6.76% in December and below market expectations of a 6.70% increase. Costs increased at a slower pace for food and non-alcoholic beverages. Year-on-year, prices increased less for food and non-alcoholic beverages (+11.4% from +11.7% in December), alcoholic beverages and tobacco (3.5% from 5.5%), clothing and footwear (5.1% from 5.3%), recreation and culture (3.7% from 7.6%) and restaurants and hotels (6.2% from 7.1%). However, additional upward pressure came from housing and utilities (at 5.6%, this is the same pace as in the previous month), miscellaneous goods and services (7.7% from 7.6%), transport (6.7% from 5.7%) and household contents and services (4.2% from 4%). Consumer prices increased by 0.60% on a monthly basis, after a 0.40% rise in the previous month. Transport prices rebounded (+1.5% from -0.4% in December), and costs rose faster for food and non-alcoholic beverages (1.6% from 0.8%) and miscellaneous goods and services (0.8% from 0.1%). The South African Reserve Bank left its benchmark repo rate on hold (at 7%) at its January 2017 meeting, as widely expected, saying the near-term outlook for inflation has deteriorated and growth remains weak. Policymakers raised inflation forecasts for 2017 to 6.2% from 5.8% due to higher international oil, domestic fuel and food prices that more than offset the more favourable exchange rate assumption. The central bank expects economic growth to be 1.1% in 2017.
Sources: SA Reserve Bank, Statistics SA, I-Net, BER, Trading Economics, MorningStar, Reuters
South Africa posted a trade deficit of R10.81 billion in January 2017 compared to an upwardly revised R12.41 billion surplus in December and below market forecasts of a R16 billion deficit. Exports declined to R80.6 billion, mainly driven by lower sales of vehicles & transport equipment (-32%), mineral products (-10%), machinery & electronics (-25%), precious metals & stones (-7%), base metals (-6%) and prepared foodstuff (-27%). SA’s major destinations for exports were China (12%), Germany (6.4%), the US (6.5%), Japan (4.6%) and Botswana (4.4%). Imports rose to R91.4 billion, as purchases rose for equipment components (+149%), machinery & electronics (+12%), chemical products (+21%), base metals (+48%), textiles (+53%) and plastic & rubber (+41%). Meanwhile, vehicles & transport equipment (-34%) and mineral products imports (-12%) went down. Imports came mainly from China (19.9% of total imports), Germany (11.6%), the US (5.4%), Saudi Arabia (4.7%) and India (4.1%).
The unemployment rate in South Africa fell to 26.5% in the last quarter of 2016 after reaching a 12.5 year high of 27.1% in the previous period. Employment rose while unemployment fell and more people continued to join the labour force, bringing the participation rate up to a new high since 2002.
Locally, the ALSI was down 3.11% in rand terms. US foreigners invested in SA equities would have returned 0.31% in USD as the rand strengthened against the US dollar in February. Resources led the losses on the ALSI, declining 9.91%, as commodity prices fell in February. The Property index dragged on the ALSI, down 0.36%. By market-cap, the small cap index led the gains, rising 1.91% as the rand strengthened against every other major currency in February. Mid-cap stocks declined by 0.40% and large-cap stocks plunged 3.91% for the month.
Consumer Services was the top performing sub-sector, returning a meagre 0.21% for the month. This was followed by oil and gas (0.00%). Basic Materials (-9.91%) was the worst performing sub-sector, followed by Health Care (- 5.53%). The Gold Mining sub-sector dropped significantly in February, returning -12.51%. Gold miners Anglo Gold Ashanti slumped by 14.20%, Sibanye Gold fell 13.11%, and Harmony Gold shed 5.65%. Other mining companies that performed exceptionally poorly were platinum miners with Impala Platinum plunging 17.59%, Anglo American Plat dropping 13.60% and Lonmin falling 9.87%. Diversified miners such as Anglo American (-11.62%) and BHP Billiton (-14.59%) also had a tough month as many investors took profits in February, following resource’s strong run in January. Rand-hedge stocks in the Top 40, such as Naspers (-1.88%), Compagnie Fin Richemont (-9.02%), Mediclinic (-8.71%) and Aspen (-8.00%) struggled under the strength of the rand over the month. Bid Corp however (+13.23%) and Steinhoff (+7.76%), were the best performing large-cap stocks, while Impala Platinum (- 17.59%), BHP Billiton (-14.59%) and Anglo Gold Ashanti (-14.29%) were the worst performing large-caps. Industrials, in particular retailers, had a steady month with counters such as Shoprite (+5.73%) and Mr Price (4.51%) providing some relief to the broader JSE index. The financials index also had a marginally positive month, adding 0.23%. The index was buoyed by gains in major banking stocks in the Top 40 index, namely, Nedbank Group (+5.51%) and Capitec (+3.27%), while other Top 40 financial stocks such as Discovery (+6.89%) and Sanlam (+4.28%) posted gains for the month as well. Overall, SA equities were sold off again in February by foreigners. They were net sellers of R9.57 billion worth of equities in February, signalling a continued decrease in investor confidence in SA equities. YTD they have sold R25bn worth of SA equities.
Source: I-Net 1 March 2017
Local fixed income markets saw better returns over the month than equities, with the ALBI (+0.71%) outperforming cash (+0.57%), inflation-linked bonds (-0.07%) and preference shares (-1.16%). The three-seven year end of the yield curve was the best performing interest-bearing asset class, returning 1.29%, followed by one-three year bonds (+1.08%). The longer end of the yield curve (12yrs+) was the worst performer, returning +0.49%. Over the last three months the three-seven year period was the best performer (+3.72%) followed by the 12yrs+ period (+3.69%) while over a year the 12yrs+ was the best performer (+14.53%). SA listed property (a hybrid asset class) had a difficult month, returning -0.36%.
For the month, foreigners were net buyers of R3.69 billion worth of bonds. However, YTD the bond market has experienced a net outflow of R2.8bn. In February, SA’s currency returns strengthened against major global peers. The rand appreciated against the US dollar (-2.50%), the pound sterling (-4.12%), the euro (-4.58%) and the Japanese yen (-0.77%).
Offshore equities and bonds both rose during February (in USD) with equities continuing to benefit from an improving economic backdrop, while Eurozone bonds saw yields decline in a flight to a risk-off environment as political uncertainty rose amidst the upcoming French presidential election. The US dollar strengthened against the euro, given the European political uncertainty and growing expectations of a possible interest rate hike in March – which materialised. Global economic data, both sentiment surveys and hard data, was a little more mixed than in previous months, but was still consistent with growth in the global economy to be around 3%. A positive Q4 global earnings season which exceeded expectations by 2% in the US, 11% in the Eurozone and 20% in Japan, supported equities. The Federal Reserve increased its target range for its federal funds by 25bp, taking it to 0.75% to 1% during its March meeting, which was in line with expectations. The US unemployment rate fell to 4.7% in February from 4.8% in the previous month. Meanwhile, the US trade deficit widened to $38.5 billion in January from a $44.3 billion gap in previous month.
Consumer prices in the US increased by 2.5% y/y in January, following a 2.1% rise in December. Commodities fell during the month of February (-1.34%), despite the rally in precious metals, while brent crude oil (-0.68%) dropped to a three-week low as record US crude oil stockpiles were seen as jeopardising OPEC’s efforts to drain a global oil surplus. Nickel (+9.91%), Iron ore (+9.52%), Silver (+4.27%), Gold (+3.14%) and Platinum (+3.83%) all rallied during the month of February.
On a total return basis, the global healthcare sector was the top performing sector for the month, returning 6.4% in USD, 7.6% in pound sterling (GBP) and 3.3% in ZAR. This was followed by both the financial services and technology sectors which returned 4.9% in USD, 6.0% in GBP and 1.8% in ZAR. Financial services was the top performing sector over a rolling one year period in USD (+44.1%), GBP (+61.4%) and ZAR (+19.4%). The worst performing global sector in February was the Energy sector returning -2.5% in USD, -1.4% in GBP and -5.4% in ZAR. The consumer defensive sector was the worst performing global sector over a rolling one year period returning 12.4% in USD, +25.8% in GBP and -6.9% in ZAR.
In rand terms, global developed market equities (+0.02%) underperformed emerging market equities (+0.41%) in February. The MSCI Developed World Index added 2.58% in USD and 4.32% in GBP whilst the MSCI Emerging Markets Index advanced 2.99% in USD and 4.73% in GBP for the month. Global property returned -0.11% in ZAR, +2.45% in USD, and +4.18% in GBP, outperforming bonds, which returned +0.47% in USD and -2.04% in ZAR. Looking at developed markets, the majority of European indices yielded negative returns for the month of February in rand terms due to the rand strengthening against most major currencies. The Dow Jones (+2.16% ZAR, +4.77% USD and +6.54% GBP), the NASDAQ (+1.16% ZAR and +3.75% USD) and the S&P 500 (+1.13% ZAR, +3.72% USD and +5.47% GBP) were the top performers for the month. Meanwhile, the Canadian TSX (-4.42% ZAR and +0.09% USD), the CAC 40 (-2.38% ZAR, +0.11% USD and +1.82% GBP), the DAX (-2.14% ZAR, +0.36% USD and +2.06% GBP) and the Euro Stoxx 50 (-1.95%, +0.55% USD and +2.26% GBP) were the worst performers for the month. In emerging markets, China’s Shanghai Composite index added 2.61% in its base currency and returned a meagre 0.21% in ZAR. However, due to the pound sterling’s weakness over February 2017, it returned +4.52% in GBP. The Brazilian Bovespa equity index advanced 3.08% in its base currency. The US dollar strengthened against both the euro (-2.15%) and the British pound (-1.66%).