With both global and local investment conditions improving over the first 11 weeks of 2017, much of this progress in South Africa was erased in the last week of March by our Cabinet reshuffle and the consequent downgrades of the country’s sovereign credit rating to non-investment grade status by S&P Global and Fitch in April. Global financial markets were underpinned by generally stronger macroeconomic data and bullish investor sentiment that drove good demand for both developed and emerging market assets. In the US, the ‘Trump reflation’ trend lost steam on rising doubts over the administration’s ability to implement pro-growth tax cuts and deregulation, while surprisingly robust growth in the UK and steady growth in Europe bolstered markets there. China experienced one of its strongest starts to a year in equities, helped by low market volatility and improving economic and corporate fundamentals.
In South Africa, a stronger rand and brightening outlooks for inflation, interest rates and growth were all reversed. The appointment of an inexperienced leadership team at National Treasury without a solid reputation for fiscal probity undermined confidence in the Treasury’s ability to implement sound fiscal policy and reforms. This, in turn, created heightened political risk and uncertainty among investors and consumers. The sovereign downgrade will, among other negative impacts, lead to higher overseas borrowing costs for government, parastatals and SA banks.
The immediate impact of these moves saw the rand depreciate about 8% against the US dollar during the last trading week of March (starting when the Finance Minister was recalled from his UK investor roadshow) and continue to weaken into April. For the month, the rand lost 2.6% against the US dollar, 3.2% against the pound sterling and 3.6% versus the euro, which would have enhanced returns from offshore assets.
Meanwhile, SA 10-year nominal bond yields rose from around 8.4% (prior to the Finance Minister’s recall) to around 8.9% on 31 March, before rising above 9% in the first week of April.
Equities were the top performing local asset class in March, with the FTSE/JSE All Share Index returning 2.7%. This reflected a relatively strong performance from industrial counters (+4.2%) given their rand-hedge characteristics, although within this, retailers lost ground. Resources returned 2.9% as commodity prices continued to rise. Financials (particularly banking shares) were hardest hit by the turmoil with a total return of -0.7% in March, and continued to weaken in April. Listed property was also sold off in late March as an interest-rate-sensitive asset, returning 0.1% for the month.
It is important to note that, because much of the local market sell-off took place in April, investment returns for March do not reflect the full extent of the weakness caused by the Cabinet reshuffle and downgrades.
Article by Pieter Hugo – Prudential Unit Trusts