Given the level of political uncertainty, July was remarkably stable in terms of overall market conditions. The JSE was helped to a large extent by improving sentiment in the greater MSCI Emerging Markets index, especially China, which made equities the top performing asset class for the month (up 7%). By contrast, property returned 3.6% in July and bonds 1.5%.
These returns are a marked improvement on the situation during May and June, and to an extent reflect the fact that the local market was oversold and a recovery was due. However, it is very important to stress once again the extreme effect that Naspers has on the JSE Top 40. The share makes up nearly 21% of the index! Fortunately, the company has done well this year (up 44%) and it gained 14% in July. Global factors, particularly prospects in China, are behind the outstanding performance of Naspers.
When you look at the green shoots in developing markets -- such as the Hang Seng index in Hong Kong rising 6% in July -- and with commodity prices rallying strongly, we might be seeing evidence of positive news for the JSE. China also reported an increase in manufacturing which will specifically benefit the resource sector.
Beyond Naspers, the overall growth theme on the JSE is that large caps with overseas exposure are outperforming mid-caps and small-caps that rely on the South African economy. Therefore, in the resources/basic materials space, big diversified mining companies such as Glencore, BHPBilliton and Anglo American did well following a strong rally in commodity prices. As always with resources, however, the sector remains very volatile -- particularly as it affected the likes of Kumba and Northam (overall up) and Arcelor Mittal (overall down).
Outside of mining, strong performers on the JSE were Richemont, Discovery, Mondi, Capitec and Vodacom.
Poor performers in July were the tech and healthcare sectors. EOH and Netcare have been disappointing all year, for example, and there is no clear indication these sectors are likely to pull out of their slump. Others, such as Barclays Africa and Bidvest, which have undergone significant restructuring, warrant closer attention.
We continue to hold Mr Price despite last year’s performance. Its fundamentals remain good and the technical setup looks positive.
Overall all our products performed well, however our position remains defensive, with a focus on stabilising portfolios and reducing downside potential.
Robert Falcon Scott (RFS)
Currently geared at 57%, RFS performed well and returned 3.4%. Returns were trimmed to some extent due to lower holdings in large caps, such as Naspers, and less exposure to the overall equity market. The fund’s weighting in Naspers is only 6.2% and the share was the largest contributor. Glencore, Northam and Mr Price also pulled their weight and ranked amongst our best holdings for July. Our worst performers were Famous Brands Reunert and KAP Industrial.
Sir Edmund Hillary (SEH)
SEH is positioned similarly to RFS, with the best holdings being Naspers, Glencore, Barloworld and PSG. The short position in Satrix 40, with a weight of 13%, dragged returns down due to the strong equity market during July. Despite that, SEH still managed a positive return of 2.2%. The fund’s long exposure is 76%, making the net exposure 63%. (We are considering increasing the Satrix 40 short position by around 5% which is dealt with below
Sir John Ross (SJR)
This was our best performing product for July with a return of just over 5%. The long exposure is 91% and the short exposure is 21%. One of the best contributing holdings is the short position in PPC. PPC’s share price has deteriorated from R32.50 in September 2014 to under R4 currently and decreased 10% during July.
Emperor IP Momentum Equity (Local)
The unit trust has a higher allocation of shares in the resource sector with shares like Anglo, Glencore, Kumba, Exxaro and Northam performing very well. Famous Brands, Invicta and Datatec were the worst performers.The unit trust returned 4.8% for July.
Easy Equities - BundlesThe conservative bundles like Elbrus and Kilimanjaro, which mostly consist of money market and bond instruments, had the lowest returns for July. Everest returned over 4% assisted by its higher allocation to local and foreign equities. The Newfunds Equity Momentum ETF and the Satrix RESI ETF were the top performers, increasing 7.7% and 12.8% respectively. The worst performers were the Ashburton Inflation ETF and Coreshares Preftrax.
In the June market report, we stressed that the JSE Top 40 remains range-bound between 42000 and 49000. That position did not change much in July, with a breakout past 49000 and a subsequent pullback to test that level. On this technical basis, there is no immediate likelihood of a significant change in momentum. Due to the top 40 being range bound and currently at the upper level of the range we will increase the Satrix Top 40 short position in Sir Edmund Hillary by 5% to take advantage of a pullback. We will also increase the long position by 5% to maintain our current net gearing level.
Over the longer term, indicators of sentiment and valuation are not overly bullish. Long-term market strength (MSX-Monthly) is still low at 52, reflecting that only 52% of the market is in an upwards trend. Hence, we remain somewhat defensive. We have stabilised portfolios in order to be better able to ride out the swings -- with a particular focus on reducing the downside potential.
While our market confidence indicator is improving, being at a multi-month high, it is not cause for exuberance and so our outlook remains cautiously optimistic with no significant changes to our portfolio positioning.
Postnet Suite 247, Private Bag X1, Melrose Arch, 2076
+27 87 940 6121
Ground Floor Block B, The Offices of Hyde Park,
Strouthos Place (off 2nd Road), Hyde Park, 2196
+27 87 940 6090
2nd Floor Villa Avant Garde, 96 Armstrong Ave,
La Lucia Ridge, Durban, 4051
+27 87 940 6110
6th Floor Hill House, 43 Somerset Rd,
Green Point, Cape Town, 8005