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.
A cynical Cabinet reshuffle, more revelations of government and parastatal corruption, slowing GDP, shrinking tax receipts, ballooning debt, a jobless rate at a 14-year high … all the signs are that we are in a worsening state of the doldrums, with no particular cause for optimism. On the economic front we will have to get used to an ugly Budget deficit and higher debt-servicing costs in the years ahead -- and that’s before we even start to consider the likely prospect of a sovereign rating downgrade. The rand has responded as per expectations of increased foreign investment outflows, weakening by 4% in October against the dollar, bringing its losses over the past two months to 10%.