Anal­y­sis

Financial Mail - Investors Monthly - - Contents - An­dries Mahlangu

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%.

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