Market Analysis - December 2017



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.



Internationally, Europe continued to disappoint, the US had a surprisingly resilient 2017, but the star performer was Hong Kong’s Hang Seng -- up 36% for the year. Emerging markets didn’t move much in December, but rose a stellar 33% in 2017.


Although the small and mid-cap indexes struggled during 2017, many of these companies are poised for an upturn should the new ANC leadership manage to fix the mess made by Jacob Zuma and bring a long-awaited rush of fresh business and investment confidence.



Among equities, Naspers was outstanding, up 71% for the past 12 months, although it slipped 6.4% in December. The company helped to lift its entire sector (Consumer Services) by 51% over the year, and given its weight on the JSE bolstered the All Share Index. Financial stocks improved on the rosier political outlook in December, driven by FirstRand and RMB, but there were inevitable disappointments elsewhere. The rotten apples exposed at Steinhoff saw the company’s share price collapse 92%. Along with poor showings by British American Tobacco (-5.31%) and Anheuser-Busch (-12.84%), the Consumer Goods sector was an overall drag on the local stock market -- as much by the strength of the rand as by operational factors.



Up 1.8% in December, the best performing shares held by the fund in December were Astral Foods, Mr Price, Kumba and Imperial. However, returns were dragged down by foreign equity ETF holdings and companies that have big offshore exposure, such as Naspers. Our gold holding in Sibanye also was hit hard, down 15.7%.


The fund rose 0.51% in December. Bidvest, Capitec and AVI were the strongest performers, but the fund was pulled back slightly on the strength of the rand, which hurt the prices of companies with foreign-currency earnings. Harmony was down a disappointing 10%.


The hedge fund benefited from lucrative short positions in Impala, Nampak and Hulamin, and long positions in Standard Bank, Mr Price, Capitec and Bidvest. Long positions in Sappi and PSG, along with the US ETF holding, did not perform as well as expected. Hence the fund fell 0.59% in December.


The local fund’s focus on JSE stocks that primarily make their earnings in rands paid off nicely, with strong contributions from Astral, FirstRand and Mr Price, along with a resilient showing by the likes of Kumba, Bidvest and Discovery. The fund rose nicely by 4.9% in December.


The more conservative bundles that were more heavily weighted towards cash and government bonds performed well. Elbrus was up 3.7%. On the downside, the more aggressive bundles with a higher allocation in foreign equity and foreign property decreased due to the strength of the rand.


Technical Review


The JSE Top 40 remains in a fairly strong uptrend since January 2017, and despite a technical pull-back in early December looks to be capable of building on its gains. The vastly improved political environment gives us some optimism that the index has at long last broken the 50000 level and is on track for new highs. As such, we would continue to increase equity exposure in the coming months.

Emperor’s MSX-Monthly momentum indicator has risen slightly to 60, which means more than half of the JSE’s shares went up in December. As for market confidence, Emperor’s Rule of 18 indicates that stocks have come down in value but are still relatively expensive at 23.

Going into the new year, there are definitely grounds for cautious optimism. The recovery in the US appears to be solid, with a high likelihood that further interest rate hikes will be required to curb excessive inflation. In turn, the SA Reserve Bank may well feel the need to stimulate the local economy with rate cuts during 2018. If political confidence picks up on the back of criminal probes into the Zuma-Gupta axis of evil, we might be on track for a buoyant 12 months.

Happy investing.

TC van der Walt

Fund Manager


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