A Look Back at the Second Quarter 2017

A combination of volatile politics and stagnant economic data made for a difficult period in the local context. Globally, there are signs of improvement on the macro economic front.

For local investors, the key is to not let the bad news overwhelm you – there are certainly upsides if you can stick to your guns and hold on to your investment strategy!

 An ever-changing SA landscape:  

• The SARB left the repro rate unchanged at 7% in July. Some analysts expect the SARB to decrease interest rates by 25bp in the second half of 2017. Edit:  21 July 2017, The SARB reduced the interest rate by 25 basis  points.
  However, an ongoing debate about the mandate of the SARB and its constitutional independence could weigh on the Rand, thereby making policy makers more cautious than normal…

• CPI inflation slowed from 6.6% y/y in January to 5.4% y/y in May. This was primarily due to moderating food inflation.

• Inflation is expected to continue to slow into early 2018, with food inflation remaining the biggest driver. Falling retail fuel prices on the back of weaker international old prices should also help. In addition, the weak consumer environment, with a combination of high unemployment, slowing nominal remuneration and poor confidence will create a very poor environment for price increases to gain any traction. An average CPI rate of 5.2% for both 2017 and 2018 is forecasted by some analysts.

• The Rand exchange rate has been relatively resilient. For more detail on this and the reasons why, see article “An EMERGING MARKET CURRENCIES Outlook – In Brief”.

• In a domestic environment marked by continued political strain, listed property delivered a return of 0.9% for the quarter. The real economy has practically ground to a halt and this will likely remain a headwind for property fundamentals for some time.

• The JSE’s financial index was flat for the quarter.

• Industrials returned 1.3% for the quarter.

• Resources suffered a sharp decline of 7.1% for the quarter amidst concerns about the mining charter.

Looking Abroad: 

• Equities continued to perform well over the quarter.

• Central banks in many developed countries began to discuss the eventual unwinding of unconventional monetary policies.

• Global listed property performed better this quarter.

Why you need to stick to your current investment strategy…

Given the barrage of negative political and economic chatter, it is undoubtedly very easy to become pessimistic about potential returns in the SA capital markets.

However, one can also build a fairly positive case for our stock market, particularly after so many shares have taken a serious beating in the last nine months or so.

For the three months to the end of June 2017, the ALSI Equity Index returned -0.4%.

With only single digit returns over the past few years, it is unsurprising that some investors are losing faith – especially when the taxable Money Market returns of 7.4% p.a. are available. That said: risk assets do outperform cash over most periods in a tax-efficient manner. Arguably, this time will be no different as the potential for interest rate cuts in SA is increasing by the day – if only to potentially boost our ailing economy.

In short – this is no time to panic and abandon your investment strategy!   

History has shown that these types of conditions (reflecting an all-time low in business confidence and a lower inflation trajectory) normally lead to interest rate cuts and a buying opportunity for local equities. Indeed, according to studies conducted by RMB, the upside potential in real returns can be significant when the market turns…

Source:  Coronation Fund Managers, MitonOptimal Multi Asset Management.