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Source: I-Net - 1 March 2017

Local Overview

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.

CPI (y/y)6.1%6.4%6.6%6.8%6.6%-
PPI (y/y)6.6%6.6%6.9%7.1%5.9%-

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.

28 February 201529 February 201628 February 2017

Sources: SA Reserve Bank, Statistics SA, I-Net, BER, Trading Economics, MorningStar, Reuters

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%.

Source: I-Net 1 March 2017

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%).

Global Overview

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%).

Spot Rates28 February 201529 February 201628 February 2017

Sources: SA Reserve Bank, Statistics SA, I-Net, BER, Trading Economics, MorningStar, Reuters

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