As we warned in the January market report, conditions looked ominous for global stocks in February. A selloff in the last week of January continued into February, sparked by what some saw as a very confusing narrative. This was an unexpectedly good employment report in the US, which investors took fright at because it suggested that the Federal Reserve would hasten its programme of gradually increasing interest rates in 2018 to counter what were assumed to be higher inflationary forces. So, as we have seen so often in world markets, what seemed to be good news suddenly turned into bad news.
With hindsight, January’s market activity ought to have looked suspicious. Despite an extremely uncertain geopolitical environment, both in South Africa and abroad, indexes showed an alarming level of complacency. When prices rise on the back of seemingly no good news or changes in fundamentals, and calmness appears to reign, sirens should be ringing. After an excellent 2017, investors carried through that mood into the new year and the outlook gave every impression of being super-confident. Volatility continued to be unusually suppressed during January and for the most part stocks rose inexorably.
As we now know, Global Markets corrected significantly in the last few days of January and into the first week of February. On the local front we have had a barrage of bad news (never mind the political shenanigans – which is looking more positive), with the fallout from Steinhoff continuing to reverberate, joined also by suspicious short activity in Capitec and nasty analyst reports on among others Resilient. Also, the strong rand hurt the price of the likes of offshore-reliant Naspers and the other rand-hedges.
That’s a story for February, though. For now, let us look back at what drove the market’s performance in the first month of 2018.
Well, that was some year, packed with ups and downs but ending on a strong note thanks to the election of Cyril Ramaphosa as boss of the ANC. The markets responded favourably to the sense of political optimism, with the rand, property and bonds strengthening and the JSE steady in December, confirming equities as the best performing asset class in 2017.
The obvious elephant in the room, at the time of writing, is the ANC elective conference. Also, in an unwelcome intrusion into the generally unsettled socio-economic environment, there is the large matter of Steinhoff. Although this review concerns November, we can happily say that Emperor funds had zero long exposure to Steinhoff, and investors in Sir John Ross have very profitably benefited from our short position in the company. I will go into a bit more detail when I discuss that fund’s performance later.