INVESTMENT NOTE HEIGHTENED POLITICAL UNCERTAINTY AS GORDHAN GOES - Old Mutual Wealth
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INVESTMENT
NOTE
3 APRIL 2017
HEIGHTENED
POLITICAL
UNCERTAINTY AS
GORDHAN GOES
DAVE MOHR & IZAK ODENDAAL,
OLD MUTUAL MULTI-MANAGERS3 APRIL 2017
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
outlook has also been upgraded, from last year’s 0.3% to 1.2% for this
year rising to 2.0% by 2019. While the MPC seems to be backing away
HEIGHTENED from its long-held view that US rate hikes would be bad for the rand, the
latest political uncertainty precludes rate cuts in the short term. However,
POLITICAL the slowdown in credit growth – to only 5.0% year-on-year in February –
argues for rate cuts.
UNCERTAINTY AS
CHANGES IN POLICY, NOT INDIVIDUALS
GORDHAN GOES COUNT
The risk of South Africa losing its investment grade credit rating from at least
one of the three major agencies has now increased. Moody’s has South
Africa two notches above “junk” status (Fitch and S&P Global are one notch
It was a week of high drama, which culminated in the removal of Finance above junk) and is scheduled to deliver a review this Friday. Global markets
Minister Pravin Gordhan, his deputy Mcebisi Jonas, and other ministers have long priced South Africa as a junk status; with our credit default swaps
(CDS) trading in the same region as Brazil, Turkey and Russia (and well
and deputy ministers on Thursday night. Gordhan’s removal was not entirely
above other BBB- countries).
unexpected but the timing was a surprise. This must be seen in the context
of the ANC’s leadership contest later this year. Until that is settled, political
It’s not about who the finance minister is but whether fiscal policy changes.
uncertainty is likely to remain. Malusi Gigaba, a long-time Cabinet member, A key test will be whether Gigaba retains the commitment to stabilising
will now be the fourth Finance Minister since December 2015. government’s debt burden around 50.0% of GDP (a level that is fairly low
by global standards). With global growth improving, the cycle of downgrades
RAND PULLED BACK that affected many sovereign and corporate borrowers could turn, potentially
The rand started last week on the front foot. Before the news broke that also supporting South Africa’s rating. Also helping is the improvement in
Gordhan and Jonas had been recalled from their overseas roadshow, the South Africa’s current account deficit during the course of last year. Trade
rand hit a 20-month high of R12.31 per dollar. It ended the week at numbers released on Friday show a further improvement in the trade balance,
R13.41 per dollar, a decline of almost 8.0%, but perhaps not as bad as with the deficit for the first two months of the year at R6 billion compared
many feared. Bank shares were pummelled on Friday but the JSE All Share to R23 billion in the same period in 2016. Exports grew 7.0%, while
Index ended the week up slightly. imports fell 3.7%.
The global context is very different to when former Finance Minister Nhlanhla Although the public tend to focus on the exchange rate reaction to political
Nene was fired in December 2015. With hindsight, the timing of that events, what really matters in the long term is the bond market response.
event could not have been worse, as global investors were already extremely After all, a weaker rand benefits large segments of the economy and the
pessimistic about emerging markets and commodity prices were close to JSE. But weaker bonds (higher bond yields) imply that government and the
multi-decade lows (certainly in real terms). The US dollar was at its strongest private sector will have to pay more for borrowing or rolling over debt in
level in 13 years as the Federal Reserve was about to embark on an interest the future (this does not apply to previously issued fixed-rate debt).
rate hiking cycle for the first time in a decade. All these factors have improved
from the rand’s point of view: emerging markets are back in favour as The yield on the government’s benchmark R186 bond increased from 8.4%
last Monday to 8.8% on Friday, not as dramatic an increase, all things
economic growth picks up, commodity prices have rebounded somewhat
considered. Since the government already spends around R160 billion per
from bombed-out levels and the US dollar appears to have peaked as only
year on interest payments on its total issued debt of R2.2 trillion it cannot
gradual interest rate hikes are expected.
ignore financial markets. When you owe that much money, your creditors
The Reserve Bank was forced to hike interest rates soon after Nene was will impose discipline on you one way or another, irrespective of who the
removed, compounding the economy’s growth decline. However, last week finance minister is.
the Reserve Bank’s Monetary Policy Committee (MPC) left rates unchanged,
and noted that it “may” have reached the end of the hiking cycle. Despite NOT THE TIME TO PANIC
its recent volatility, the rand has strengthened over the last 14 months and Investors are becoming used to political shocks in recent times. The United
the inflation outlook improved (the rand-dollar exchange rate was Kingdom giving formal notice of its intention to leave the European Union
R13.60 at the time of the MPC meeting in January). The Reserve Bank was the other big story of the week. The lesson from the Brexit referendum
expects inflation to average 5.9%, down from its previous forecast of 6.2%, and the US election is clear: don’t make knee-jerk portfolio changes,
while the 2018 forecast has been lowered to 5.4%. The local growth because the market does not always react as expected.
2WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
Such events always evoke strong emotions, even among seasoned investment
professionals. But making investment decisions based on emotions is almost
CHART 1:
RAND – US DOLLAR EXCHANGE RATE AND SOUTH AFRICAN
always the wrong thing to do. One of the reasons we like team-based GOVERNMENT BOND YIELD
asset managers (and operate in a team-based environment ourselves) is
that team members can encourage one another to remain focused and 18 South Africa Rand Per US Dollar 11.0
Nene fired
assess things rationally. We urge clients to do the same and refrain from 17
R186 Government Bond Yield % (Rhs)
10.5
making reflex investment decisions in response to developments that have 16
10.0
probably not played out fully. 15
9.5
14
The best defence against uncertainty is appropriate diversification. It might
9.0
13
feel safer fleeing to cash or taking all your assets offshore but such
8.5
12
concentrated, fearful portfolios typically do not deliver the desired outcome Gordhan fired
11 8.0
over time.
10 7.5
Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar
STRATEGY FUNDS WELL POSITIONED TO DEAL 15 15 15 15 15 16 16 16 16 16 16 17 17
WITH UNCERTAINTY Source: Datastream
Our Strategy Funds are well diversified and have the maximum offshore
allocation allowed by Regulation 28. This portion of the portfolio benefits
CHART 2:
from a weaker rand. A weaker rand benefits around more than half of the
JSE, so our local equity allocation also offers substantial currency diversification.
Local bond yields remain attractive relative to expected inflation and the SOUTH AFRICAN RESERVE BANK’S EVOLVING GROWTH
FORECAST (AT THE TIME OF EACH MPC MEETING)
long-term average yield. Therefore, our funds are well positioned to deal
4.0%
with these uncertainties.
3.5%
3.0%
2.5%
2.0%
1.5%
GDP Forecast 2015
1.0%
GDP Forecast 2016
0.5% GDP Forecast 2017
GDP Forecast 2018
0.0%
Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar
13 13 14 14 14 14 15 15 15 15 16 16 16 16 17
Source: SA Reserve Bank
CHART 3:
SOUTH AFRICAN RESERVE BANK’S INFLATION FORECAST
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
Inflation Forecast 2015
4.5% Inflation Forecast 2016
Inflation Forecast 2017
4.0%
Inflation Forecast 2018
3.5%
Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar
13 13 14 14 14 14 15 15 15 15 16 16 16 16 17
Source: SA Reserve Bank
33 APRIL 2017
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
EQUITIES - GLOBAL
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
Global MSCI World US$ 1 854.0 0.43% 0.82% 5.88% 12.16%
United States S&P 500 US$ 2 363.0 0.81% -0.04% 5.54% 14.49%
Europe MSCI Europe US$ 1 570.0 0.19% 3.63% 6.73% 5.72%
Britain FTSE 100 US$ 9 137.0 -0.16% 1.62% 3.69% 2.48%
Germany DAX US$ 1 198.0 1.01% 5.09% 8.69% 14.75%
Japan Nikkei 225 US$ 168.3 -2.92% 17.39% 17.39% 12.03%
Emerging Markets MSCI Emerging Markets US$ 958.0 -1.14% 2.35% 11.14% 14.87%
Brazil MSCI Brazil US$ 1 835.0 -0.16% -4.58% 9.75% 37.87%
China MSCI China US$ 66.1 -1.30% 2.12% 12.91% 17.34%
India MSCI India US$ 521.3 1.53% 5.74% 16.62% 17.41%
South Africa MSCI South Africa US$ 470.0 -8.74% -1.05% 3.52% 6.33%
EQUITIES - SOUTH AFRICA (TR UNLESS INDICATED OTHERWISE)
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
All Share (Capital Only) All Share (Capital Index) Rand 52 056.0 0.46% 1.78% 2.77% -0.84%
All Share All Share (Total Return) Rand 7 250.0 0.69% 2.68% 3.78% 2.06%
TOP 40/Large Caps Top 40 Rand 6 288.0 1.37% 3.30% 3.90% 0.11%
Mid Caps Mid Cap Rand 15 989.0 -2.55% -0.12% 1.13% 8.25%
Small Companies Small Cap Rand 21 347.0 -0.95% 0.16% 4.54% 13.94%
Resources Resource 20 Rand 1 995.6 5.96% 3.34% 1.93% 13.65%
Industrials Industrial 25 Rand 12 911.0 1.35% 4.66% 7.12% -1.73%
Financials Financial 15 Rand 7 653.0 -4.62% -0.87% -1.93% -3.16%
Listed Property SA Listed Property Rand 2 131.9 -2.74% 0.09% 1.37% 1.13%
FIXED INTEREST - GLOBAL
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
Global Government Bonds Citi Group WGBI US$ 904.1 0.49% 2.24% 3.78% -2.01%
FIXED INTEREST - SOUTH AFRICA
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
All Bond BESA ALBI Rand 546.6 -3.22% 0.40% 2.49% 11.37%
Government Bonds BESA GOVI Rand 544.7 -3.22% 0.44% 2.52% 11.18%
Corporate Bonds SB JSE Credit Indices Rand 144.4 -1.81% -1.75% -0.12% -18.51%
Inflation Linked Bonds BESA CILI Rand 244.3 -2.38% -2.15% -0.53% 3.43%
Cash STEFI Composite Rand 362.8 0.14% 0.63% 1.86% 7.58%
COMMODITIES
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
Brent Crude Oil Brent Crude ICE US$ 53.1 4.22% -5.12% -6.79% 32.83%
Gold Gold Spot US$ 1 256.0 0.88% 0.56% 9.12% 2.53%
Platinum Platinum Spot US$ 948.0 -1.66% -7.33% 4.98% -1.46%
CURRENCIES
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
ZAR/Dollar ZAR/USD Rand 13.44 -7.60% -2.32% 1.85% 10.85%
ZAR/Pound ZAR/GBP Rand 16.78 -8.70% -3.16% -0.48% 27.77%
ZAR/Euro ZAR/EUR Rand 14.37 -6.54% -3.41% 0.49% 17.61%
Dollar/Euro USD/EUR US$ 1.07 0.93% -1.21% -1.68% 5.61%
Dollar/Pound USD/GBP US$ 1.25 -0.02% -0.62% -1.42% 15.41%
Dollar/Yen USD/JPY US$ 0.01 1.12% -1.12% -3.37% 0.00%
Source: I-Net, figures as at 31 2017
43 APRIL 2017
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
THE WEEK AHEAD
SOUTH AFRICA
• Absa manufacturing purchasing managers’ index (PMI)
• Standard Bank PMI
• Naamsa new vehicle sales
• Moody’s scheduled credit rating review
USA
• ISM manufacturing and services indices
• Vehicle sales
• Trade balance
• Non-farm payrolls and unemployment rate
EUROPE
• Eurozone unemployment
• Eurozone retail sales
• Eurozone Composite PMI
CHINA
• Manufacturing PMI
The Old Mutual Wealth Investment Note is published on a weekly basis to keep our clients and financial planners informed of what is happening in financial
markets and the economy and to share our insights. Markets are often very volatile in the short term and similarly, economic data releases or central bank
actions may cause concerns for investors. This does not mean that investors should take action based on the most recent events. It is better to be disciplined
and remain invested in well-diversified portfolios that are designed to achieve long-term objectives. Our Strategy Funds are actively managed, with asset
allocation changes based on valuations and in anticipation of future real returns, and not in response to the most recent market noise. The future is always
uncertain and that is why our Strategy Funds are diversified and managed with a long-term focus.
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