Market Overview

The general market trend for the quarter ending March 2017 was Rand strength and falling bond yields. The Cabinet reshuffle however put an immediate halt to this.

It was one of the most comprehensive Cabinet reshuffles since 1994 and it came as a major shock to investors. Whilst many investors were dreaming of a “no confidence” vote most expected the most probable event to be some form of reshuffle. The reshuffle finally happened and it was more material than ever expected.

It immediately caused immense damage to the country’s reputation. S&P downgraded our long-term foreign debt rating to junk status, whilst maintaining our local debt rating at one notch above junk but changed the outlook to negative. Fitch downgraded both our local and foreign debt. Moody’s will review both our ratings in the next 90 days.

The consequence has been a weaker Rand. Fortunately it has not been as severe as “Nenegate” (December 2015). This time the market expected the reshuffle so investors were somewhat prepared. Further, the shock was buffered by the positive sentiment towards emerging markets and more specifically emerging market bonds. Offshore investors hunting for extra yield overlooked our problems and continued investing in our bond market due to our favorable annual returns of between 8.5% and 9%.

Looking forward, it will take a while for markets to settle and for investors to figure out how to position their portfolios. Uncertainty about the much needed and widely expected economic recovery this year and beyond will be the key talking point.


We simply have to accept that we are now due for yet another period of material market volatility. The main reason is that South Africa’s inclusion in major bond indices is dependent on an investment grade rating of South Africa’s local currency debt. If our local currency rating is downgraded to non-investment grade, we may experience material capital outflows and such would put pressure on our bond market and our currency. Offshore investors will simply then look elsewhere for opportunities. The essence of a sub-investment grade status is that offshore investors, especially offshore pension funds who are by law not allowed to invest in sub investment grade bonds, will have to sell our bonds. If our currency then depreciates as a result of offshore investors selling our Rands, inflation and short-term interest rates will rise sharply. The impact on our government’s debt servicing requirement would become more onerous. Finally the man in the street, the consumer, would feel the pinch.

Quite worrying is that history shows that it takes much longer for a country to regain a lost investment grade rating than to lose it. Only a minority of countries that have lost their investment rating over recent decades have succeeded in gaining it back. If our local rating is therefore downgraded below investment grade later this year then we have a long and tough path to recovery.

On every investor’s mind is the ANC’s National Policy Conference in June as well as their Elective Conference in December. The results should provide some insight into the direction, which the economy and our investment market may move to in the medium term. We dream on…


Our robust portfolio management and investment manager selection process ensure that our clients’ portfolios are well diversified and positioned to not only, protect against capital losses but also to capture investment opportunities that may arise.

Whilst our portfolio construction has recently reflected more exposure to growth assets such as equities and listed property against a backdrop of improving economics and because local equity valuations have improved after a flat market over the past two years we have still been relatively cautious and conservative.

We remain bullish on our local bonds despite all the political noise and uncertainty and the impact thereof on our bond markets. The real yield on our bonds offer remains attractive relative to that of other developed and emerging markets.

We have been marginally below our maximum allowed offshore exposure. Whilst this part of our portfolios has been negatively impacted on the back of Rand strength, such exposure is now acting as a portfolio hedge against adverse political events. A synchronized global recovery in corporate earnings is supporting offshore equities and we favor this asset class to offshore cash and bonds. We are however cognizant that the Dollar may have reached the peak of the short-term bull market and the “Trump trade” appears to be taking a breather.


If there is one thing we know it is not to panic when market events beyond our control occur. We understand what we can control and what we can’t. We can’t control the economy, interest rates, exchange rates or the political climate. Also, making decisions based on the outcomes of politics is simply speculation. Whilst politics have an impact on financial markets these are mostly short-term and we are long-term investors. We can’t control the wind but we can set our sails to adjust to the wind.

The optimal wealth management strategy for investors over time has been to stick to their well-constructed financial plans and to stay invested throughout short-term volatility. When “Nenegate” happened in December 2015, markets immediately fell sharply in the next few days. The Rand and our local bonds depreciated by about 10%, listed property by 15% and, within equities, banks lost as much as 20%. However, investors who remained invested in these assets have since then more than recouped these losses.


A last thought about long-term investing – our local stock market has delivered the best long-term equity returns in the world. Our corporates have therefore proven that they outlast periods of extreme economic and political environments. It’s about time in the investment markets and not timing the investment markets.

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