Market Analysis - October 2017

17/11/2017

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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%.

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For all that grim news, however, as investors we have to thank our lucky stars that much of South Africa’s economy, driven by its biggest listed companies, is firmly international in both focus and operation. Hence it was little surprise to see the All Share index up 6% in October. We must take care not to get too excited because the performance of the global mega-caps clouded the reality that much of domestic-focused corporate SA is suffering in this economic climate. As expected, bonds fell 2.3%, property eked out a 2% gain.

Most international markets were up, driven by Japan’s Nikkei, Hong Kong’s Hang Seng, the Nasdaq in the US, and Europe. The notable laggard was the UK’s FTSE. Emerging markets rose 3.5% in October, bringing gains for the year to 30%.

On the JSE, the hottest sector was Consumer Services (up 12%), mid-caps were up 4%, and small-caps rose 2.2%. The only losing sector in October was Telecoms, down 2.7%.

The standout shares on the JSE were, as usual, Naspers (up 18%), Sasol (up 11%), Life Healthcare (up 10%), and Capitec (up 9%). On the downside, the saddest case remained Woolworths (down 20% in 2017 after another horrible month), and Vodacom (5% down in October and sliding further on previous falls).


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Looking overseas, the US, Asia and Europe all registered gains. But this month’s biggest driver of global equity performance goes to Asia (with the Nikkei 225 up 8.13%). The Dow, Nasdaq, CAC and Dax also showed pretty good strength. As a result, foreign ETFs performed brilliantly, boosting the returns of the Emperor funds that hold these index trackers.


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ROBERT FALCON SCOTT

Given the reduced gearing in our managed funds, we are pleased to report generally good performance in October. Robert Falcon Scott was up 3.9%, helped by exposure to strong local equities including Northam, Glencore, Naspers, Dis-Chem, and PSG.

SIR EDMUND HILLARY

The fund was 3.1% stronger. Notable shares were ArcelorMittal (up 38%), Merafe (up 18%), Northam (up 12%), and Astral Foods (up 12%). While the Divi and Indi JSE index trackers were stable, the fund benefited from its holding in offshore exchange-traded funds and the Satrix Emerging Markets ETF

SIR JOHN ROSS

The fund was up 4.3% in October, for the most part driven by holdings in Naspers and Dis-Chem and the short  positions in Telkom and Aveng.

UNIT TRUST -- EMPEROR IP MOMENTUM EQUITY (LOCAL)

The fund was up 6.1% on the strength of offshore holdings, as well as Naspers. It bears mentioning that while we are grateful for the recovery in the JSE, the vast bulk of the index’s performance is driven by Naspers. The company has contributed around 70% towards the JSE Top 40’s 22% gains this year. If you add in the contribution of Richemont (up 18%) and Anglo American (up 6%), just three shares make up 90% of the JSE Top 40’s returns. This is not to say the market outside of the big three is entirely hopeless. The following shares showed strongly in October: Capitec, Discovery, Bidcorp, Fortress, Mondi, BAT, Shoprite, BHP, Sanlam, and Mr Price. The losers on the JSE front were Netcare, Woolworths, Absa, MediClinic, and Steinhoff.

EASY EQUITIES -- BUNDLES

We are happy to report that our multi asset bundle offerings were up between 1% and 4% (depending on each fund’s equity holdings), with the only decrease (1.1%) seen in the conservative bundle due to falling local bond prices.

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Technical Review

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We have been paying particular attention over the past few months to an important support/resistance level on the JSE Top 40, at 49000. There has been a fair amount of yo-yoing as the level has been tested, but in October we saw a significant breakout to the 52000 range. Bearing in mind the contribution of the big three JSE stocks, it would be extremely positive if the local market could build on its short-term strengths and show signs of sustained bullishness. For now, however, our “rule of 18” tells us that stocks have gotten relatively more expensive (PEs adjusted for inflation) and hence the JSE overall does not show good value. In terms of market sentiment, our MSX-Monthly momentum indicator shows that only 55% of shares are trending higher. Above 60% would be a good sign that confidence is returning to the market as a whole -- not just to a handful of outperforming stocks. In conclusion, we require fundamental political change and a commitment by the government to boost employment, encourage corporate investment, and lift consumer spending before we can begin getting excited about a market that is sorely lacking at present in both confidence and value.


 

Happy Investing

TC van der Walt

Fund Manager

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