Market Analysis - August 2017



August was a funny kind of quiet month, given the drama of local politics, the mysteries of what Donald Trump will do next, North Korea’s nuclear provocation, and the unending tragicomedy of Brexit. Despite it all, markets drifted upwards seemingly without a care in the world.

Much talk in the likes of London’s Financial Times has centred on the lack of volatility in global markets. It appears that the unending supply of “free” money supplied by first-world central banks, under the guise of quantitative easing, continues to flow into “risk” assets. There is, as yet, no signal from them that this policy of supporting investment markets will stop.

As a result, international markets in general had a steady August. The standout performer was Hong Kong’s Hang Seng index, which was up 2.3% and is by far the best international performer this year with a return of over 27%. In rand terms, the S&P500 in the US has offered little more than break-even returns.



Back home, the JSE All Share Index was up 2.4% in August. Mid-caps were up nicely while small-caps lagged, but the biggest contributors to gains were Basic Materials, Industrials, and Telecoms. Naspers, Richemont, and BHP Billiton remain the best-performing stocks for 2017.




Despite the rand strengthening on the back of dollar weakness, the prices of minerals rose strongly, reflected in the performance of Glencore, BHP Billiton, Exxaro, Assore, Anglo American and the platinum producers.

Drilling into the JSE Top 40, there are some standouts. In retail, Shoprite continues to steal market share from Woolworths, and Truworths remains resilient. Sanlam, Gold Fields, and MTN are stocks to watch. On the down side, we are watching for signs of a rebound from the likes of Bidcorp and BTI.




Nothing much changed from July to August. Gearing remained at about 58% and the fund returned 0.9%. Not spectacular, but it is geared towards stability. We are happy with Shoprite’s contribution, along with Northam and Barloworld.


The fund was up 0.5% for the month, which reflects a measure of caution we have had over the past few months. The focus is on limiting the downside, which means net gearing has remained at 64%, a conservative standpoint given the uncertainty in the market. Further reasons for our stance are detailed in the technical review below.


The fund was up 1.5% in August.  Net gearing was maintained at 70%. The fund benefited from a run by Shoprite and Capitec, along with holdings in the Basic Materials sector. In the news during the month was PPC, a company in which the fund held an extremely profitable short position. We have benefited well from its good run (downwards) but we will not be greedy: we have been reducing our short holding and are likely soon to take profits and sell out of PPC altogether.


The pick of the bunch was Assore, up 30% in August, and Exxaro, on the back of good earnings reports and better commodity prices. Both sales and revenue looked excellent, thanks to China. Among the rest of the holdings, losses were limited to 0.2%, which helped the fund gain 3.5% in August.


In general, returns were in the region of 1%, decent in this environment. The most remarkable performance for the year has been Everest, with over 7% return. The biggest contributors in equities have been holdings in Satrix Resources, locally, and the global Ashburton mid-cap fund. Bonds and property have remained steady.



Technical Review

In July we noted that the JSE Top 40 had tested and rebounded off the 49 000 level. This remains a crucial tipping point for the future health of local stocks. August saw the market break this critical level, only to fall back.


Since early 2014, when the last proper bull market petered out, we have remained range-bound. It is entirely expectable in a universe of no political certainty and prospects of low growth.

Valuation is a vital metric. Our “rule of 18” holds true. It indicates that Emperor’s rating of price-to-earnings ratios adjusted for inflation (even excluding the outlier Naspers) remain relatively high. Although it has improved, it is still above average. It is an expensive market.

We must not ignore market sentiment. Confidence is very fickle, and it is no wonder the market is treading water. Our MSX-Monthly indicator shows that barely half of the market is trending higher. For a bullish market, we would like to see the figure at 65% or higher. By comparison, in the post-crisis years 2007-2014, the indicator peaked at 80% and averaged around 70%.

It has been a deceptively quiet month. Short-term confidence in the market has improved slightly, but our long-term momentum indicators show we are nowhere near levels at which we would dramatically change the positions of our portfolios. This is not a time to take chances.


Happy Investing

TC van der Walt

Fund Manager


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