Market Analysis - January 2018



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.



In January, international markets were mostly positive. Asia’s Hang Seng index led the pack of the world’s 20 largest equity markets (up 9.92% for the year, its best start in more than three decades), followed by the US (up about 6%). Emerging markets started the new year very positively, up more than 9%. Long may that trend continue. Europe, however, continued to disappoint.


On the JSE, there was an extremely positive showing by industrials (up 5.4%) and basic materials (up about 3%), but the market was pulled down by healthcare and technology. However, the most significant impact was felt by property stocks like Resilient, Fortress, and Greenbay, which contributed heavily to the 3% drop in the financial sector and were a significant drag on the All Share Index. Despite this, the FTSE/JSE Top 40 ended January on a positive note.



Among industrials, Steinhoff increased 47% but the stock has been incredibly volatile -- trading between R4 and R10 over the past two months. We are still awaiting the final audit report on the company and clarity about any findings of irregularity. Mr Price and Bidvest showed nice strength, and sentiment seemed to be positive towards large-cap Anglo American.



The fund went down 0.6% in January. Our worst performers were Capitec (down 27%), Sibanye (down 12.3%), but the fund benefited from long positions in JSE Ltd and Mr Price.


The fund was down 2.9%, on the back of its higher weightings in Capitec, PSG and Harmony Gold. The best performers were Bidvest and Glencore. During January the fund added to holdings in AVI, Afrimat, Barloworld and Richemont. We strengthened our position in the DIVI and INDI exchange-traded funds. In addition, we sold out of Fortress and Mondi, slightly increased our short hedging position on the JSE Top 40 but added more weight to Naspers.


The fund lost 0.1% in the month. The pullback came mostly from our long positions in financial holdings, Capitec and PSG. Our short holdings in Hulamin and Intu properties together with the long position in Mr Price and Bidvest performed very well for the fund.


Our long holdings in Capitec, Astral Foods, Exxaro and Discovery resulted in the fund ending the month at a disappointing -1.3%.


The bundles with holdings in property and foreign equity did not perform very well in January, partly due to the rand gaining 4% in the month. However, lower-risk bundles with higher weightings in fixed income instruments performed better.


Technical Review

As we know now, the JSE Top 40 fell about 10% since 26 January and is now (12 February) at the critical 50 000 technical support level. We will have to wait and see if the index can test and then break this line of resistance. At the end of January, the Top 40 was at what appeared to be a pretty solid 52 614.


Emperor’s MSX-Monthly momentum indicator for January was at 60%, which is still not great in terms of overall bullishness. Simply put, only 60% of stocks on the Top 40 were in an upward trend according to our indicator. In February, the indicator fell further, to around the 55% mark. The indicator has been hovering between the 50% and 60% mark since August last year.

As for market valuation, Emperor’s Rule of 18 indicates that the market stock valuation has improved but is still relatively expensive at 22.

Looking forward to February’s market report, there will not be a great deal of good news -- at least in the first part of the month. So for the meantime we remain cautiously optimistic on the South African economic outlook and if the South African political situation sorts itself out the market may well attract more positive attention from local and global investors.

For one thing, the recent Mining Indaba in Cape Town reflected a surge in interest among participants in the greater southern African resources complex, which includes Zimbabwe, Angola and Mozambique. We can only hope that the commodities cycle continues to turn in South Africa’s favour since that sector of the JSE is likely to provide support for a host of industrial, financial and construction companies.

Jacob Zuma resigns (Updated 15 February).

On the evening of February 14, 2018 Jacob Zuma publicly announced that he will be stepping down as president with immediate effect. His time as president has been marked by controversy and corruption but the removal of Jacob Zuma is a victory for the people of South Africa. Deputy President Cyril Ramaphosa is expected to be appointed as acting president of South Africa on 15 February 2018 – an appointment to be affirmed by Chief Justice Mogoeng Mogoeng.

As South African’s we must continue to fight corruption and believe in a better tomorrow – it will not be easy but it is within our grasp. Hopefully Ramaphosa can make better choices when he starts with cabinet reshuffles. Let us show the world that we are serious about economic growth! 

Happy investing.

TC van der Walt

Fund Manager


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