Our local politics produced another controversial quarter. At the forefront was KPMG South Africa with respect to their work on behalf of the Gupta family and work performed in 2014-2015 on the ‘Report on Allegations of Irregularities and Misconduct’ which were produced for the South African Revenue Service (SARS rogue spy unit report).
President Zuma survived yet another vote of no confidence. Having survived several of these in the past, this was the first ever by way of secret ballot. According to Africa Check (a non-profit organisation which promotes accuracy in public debate and the media), the opposition managed to secure 177 for the motion, versus 198 against, out of a total of 384 votes. This was by far his closest survival to date, suggesting that the Zuma camp is perhaps losing ground.
The continued deterioration of our state-owned enterprises (SOE’s) remains worrisome. Government has approved the transfer of funds from the National Revenue Fund to South African Airways (SAA) to allow the airline to address the debt obligations to Citibank, thereby avoiding a default. Treasury said that a default by the airline on the R3 billion loan would have triggered other lenders to force SAA to repay loans totalling R16.4 billion and hence the bailout. The cumulative total of bailouts since 1999 now stand at approximately R14.4 billion.
South Africa experienced a 14-point drop in the World Economic Forum’s (The “WEF” is an International Organization for Public-Private Cooperation and is committed to improving the state of the world) Global Competitiveness Index for 2017-2018. We are currently ranked as 61st overall. The primary contributors to our slide was attributed towards corruption, crime and theft and government instability when it comes to doing business in South Africa. The WEF also emphasized that our economy is nearly at a standstill with the persistently low international demand for our commodities and high unemployment rate of 27.7% making matters worse.
The African National Congress (ANC) 8th provincial elective conference held in KwaZulu-Natal in November 2015 was found invalid by the Pietermaritzburg High Court. What makes matters worse for the ANC is that KwaZulu-Natal also has the largest ANC support base countrywide.
Minister Gigaba’s released an “inclusive growth action plan” for our economy and the way forward. Government engaged with various stakeholders and several major concerns were raised, amongst others:
- Continued slow growth and the potential impact on the fiscal framework;
- Rising government debt;
- The position of SOE’s and risks to contingent liabilities;
- Policy uncertainty and low business and consumer confidence.
The proposition included a 14-point plan which sets out the required intervention, the responsible authority and the specific timeline thereof.
President Zuma signed into law the Financial Sector Regulation Act of 2017 or more commonly known as “twin peaks” approach. Firstly, this model will see the creation of a prudential regulator (the Prudential Authority) housed in the South African Reserve Bank (SARB) and the SARB will be responsible for the regulation of all financial institutions. Secondly, the Financial Services Board (FSB) will be transformed into a dedicated market conduct regulator (the Financial Sector Conduct Authority) which will replace the current FSB. Different sections of the Act will come into effect on different dates, to coincide with the establishment of the two regulators. It is anticipated that the authorities will be established in early 2018.
Contrary to our politics, fortunately local equity assets had a stellar quarter in line with other strong performing emerging markets. The local equity market and listed property market returned 8.91% and 5.73% respectively. If one thinks that our local equity market has moved sideways for three years, returning 7.18% annually over the previous three years, then the last quarter’s strong performance is material and much awaited. In our previous market commentary, we outlined our decision to move our clients monies overweight to local equities and our client’s performances benefited from such.
Market gains, however, have not been broad based and Naspers has been a major contributor in pushing the entire market higher. The graph below reflects Naspers ’performance versus the market.
Returns were primarily driven by the rebounding resource sector (especially diversified miners) which gained 17.82%. The weaker Rand also played its part in better returns for our local equity market as it lost ground against all major currencies – it depreciated by 3.71% to the US Dollar. The Rand does, however, remain marginally stronger for year to date – stronger at 1.22%. Our currency has been supported by consistent trade account surpluses, a narrowing current account deficit and higher bond yields.
Interestingly, July 2017 saw the first-time foreigners were net purchases of SA equities in more than 23 months. As a result, our stock market yielded a very strong 7.03% in July. Foreigners continue to buy our bonds which helps our currency to trade in a narrower range. The graph below illustrates the net purchases by foreigners on our bond and equity market:
SA government bonds and money market instruments returned 3.68% and 1.84% respectively for the quarter. We experienced a rate cut for the first time in five years, with the SARB lowering the Benchmark repurchase rate by 25 basis points to 6.75% from 7%. Although inflation showed an uptick in September, our domestic real yield curve remains attractive relative to other peer emerging market economies. That said, our bond yields remain vulnerable to potential further credit rating downgrades and investors will keep a close eye on November’s review. The graph below reflects the SARB’s interest rate hikes and cuts over the last five years:
The tables below provide a broad local market snapshot for the 3rd quarter as well as other longer periods:
|SA Inflation||SA Money Market||SA Inflation Bonds||SA Fixed Rate Bonds||SA Listed Property||SA Equities|
|Small Caps||Mid Caps||Large Caps||SWIX||ALSI|
Offshore growth assets also experienced a solid quarter with global technology stocks leading the way. Global equities and property returned 9.09% and 5.07% in Rand terms respectively. Interesting enough, the CBOE Volatility Index (VIX), which shows the market’s expectation of 30-day volatility, fell to its lowest point ever and closed a record 10 consecutive times below the level of 10. This also indicates the degree of “complacency” in markets albeit that major uncertainty prevails.
Offshore bonds returned 5.54% in Rand terms with inflation remaining benign in most advanced economies. As expected, The Federal Open Market Committee (FOMC) confirmed the gradual pace of reduction of its balance sheet and normalisation of its policy rate.
The table below provides a broad offshore market snapshot for the 3rd quarter as well as other extended periods (returns in ZAR):
|ABSOLUTE PERFORMANCE IN ZAR|
|US Inflation||USD Cash||Global Hedge FoFs||Global Bonds *||Global Property||Global Equities **||ZAR/USD|
*Global Bonds: Barclays Global Aggregate Bond Index
**Global Equities: MSCI ACWI
Looking forward, our local economic growth outlook remains constrained with the GDP forecast for 2017 being 0.6% and 1.2% for 2018.
The final quarter of the year will potentially be a watershed one for our country. All eyes will be on the Medium-Term Budget Policy Statement on 25 October 2017. The deterioration in GDP growth in 2017 could see revenue receipts fall short of the budget target by as much as R40bn to R50bn. Expenditure, however, is not expected to exceed the budget target which could partially counter the effect of the shortfall in revenue receipts.
Credit rating reviews in November will be very important for our country. Moody’s and S&P’s next reviews are scheduled for November 24 but it is widely expected that all the agencies will wait until the ANC National Elective Conference to provide an update.
Further, the 54th ANC National Elective Conference will be held between 16 and 20 December 2017. The National Conference is the supreme ruling and controlling body of the ANC and very important to the ANC. The National Conference (NEC) is called every 5 years by the ANC to:
- 1. Decide and determine the policy, programme and constitution of the ANC;
- 2. Receive and decide on reports of the NEC including the Presidential Address, the Organizational Report delivered by the Secretary General, the Financial Report delivered by the Treasurer General and a report on the work of the Leagues;
- 3. Exercise the right to review, rectify, alter or rescind any decision taken by any structure, committee or Officials of the ANC;
- 4. Elect the National Officials and additional members of the National Executive Committee.
This conference will be very important to say the least as South Africans will obtain a better idea of the post-Zuma era and the way forward.
Markets will also keep a close eye on central banks and in particular the Federal Reserve (Fed) as it is widely expected that they will hike interest rates in December.
Global growth conditions remain favourable despite some geopolitical risks. This quarter saw North Korea conducting nuclear tests on a regular basis which led to increased global risk and tension between US president Trump and North Korea’s leader Kim Jong-un. Trump was very quick to take to Twitter and famously tweeted that North Korea “will be met with fire and fury” should they continue to threaten the US.
US president Trump has also not yet managed to pass any reforms through Congress. His campaign promises included the tax reform, infrastructure spending and repealing Obamacare.
It is more important than ever to stick to your investment strategy through these times of uncertainty. The anonymous saying “control the controllable“ has never been more applicable than now. As investors, we should focus on what we can control rather than focusing on all the uncertainties.
There are many aspects that we can control, amongst others:
- ♣ Prudent asset allocation and good fund diversification;
- ♣ Staying invested and keeping the course with your investment strategy;
- ♣ Accept that short term volatility is part of the journey.
The biggest mistake an investor can make is to try and time the market. It is not all the uncertainties itself that is the biggest threat to our investments but rather ourselves and our irrational behaviour.
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