Analysis

MARKETS Rand hits industrials and all-share index

The South African markets exhibited a mixed performance at the start of the third quarter, which was dominated by the rand’s outperformance. But the stronger currency took a bite out of the big and influential industrial shares on the JSE, leading to a sub-par all share index performance.

The rand has benefited handsomely from the Brexit vote, which has thrust a few of the world’s major central banks into an easing mode to counter the fallout that has left the pound, in particular, badly bruised.

The Reserve Bank of Australia and the Bank of England have cut their already low interest rates, with the latter introducing extra stimulus steps to soften the blow of the June 23 decision to quit the 28-nation bloc.

The easy monetary environment had implications for sovereign bonds, particularly in the UK, where the yield on the benchmark 10-year note has hit a series of lows below 1%. Equivalent bonds in Germany and Japan have been in negative territory for some time.

This dynamic has provided a boost to emerging market assets that offer relatively higher returns. The so-called hot money from overseas has, thus far in 2016, flown into the local bond market (R57.69bn), outpacing the local share market — which has had net capital outflows.

The bond inflows have boosted the rand, which has broken through R14/$ for the first time since the fourth quarter of 2015.

The currency has managed a steady improvement since falling to R16.87/$ in January when global markets were in freefall because of global growth worries.

The stronger and stable rand eases high inflation, which motivated the Reserve Bank’s monetary policy committee in the first half of 2016 to hike rates by a cumulative 75 basis points.

The firmer currency reduces the probability of further policy tightening in the short term — good news for cash-strapped consumers, retailers and banks.

But the stronger rand has taken its toll on the industrial stocks, which generate the bulk of their revenues overseas and make up a chunk of the R15.08 trillion all share index.

“Basically offshore earnings are being punished by the currency appreciation. Locally, we are seeing anaemic growth at best with little sign of any improvement. This is not a story of an improved SA but a search for yield that has led to a stronger rand,” says Lloyd Priestman, market analyst at Caleo Capital.

The local share market has underperformed the MSCI emerging markets and MSCI world indices since Brexit. Excluding dividends, the all share has returned under 2% in the seven weeks through the middle of August versus the MSCI emerging market’s 14%.