Quarter 3 Review

There’s been a rally in SA equities in the last quarter. Some sectors have done really well. If we compare the returns to the rest of the world however, we are lagging. Why? Own goals on the political front.

Against our Emerging Market peers, we have underperformed by more than 50% over the last two years in dollar terms.

Global sentiment is certainly picking up with investors seeking high yields across the globe due to depressed interest rates in the developed world. We continue to see inflows into our own bond market despite the credit ratings downgrades and political uncertainty.

China posted returns in excess of 40% for 2017. Sentiment out of Europe is also improving with good returns from the major European countries. The story in Europe will unfold as the European Central Bank looks at its monetary policy and its QE-program (Quantitative Easing).

Domestically, earnings growth has improved by almost 30% year-on-year. This was partially driven by some of the resource stocks reporting satisfactory results. Resources have been the standout performer from an investor viewpoint – up 17.8% for the three months ending September. One of the contributing factors was an uptick in commodity prices with The Economist Metals Index recovering from the deflated prices in 2015. The All Share Index’s Price to Earnings Ratio, which measures how expensive the index is, has dropped from 22.8 in October 2016 to 15.3 in September 2017. This indicates a cheap domestic market and generally appetite increases at a lower PE ratio.

Foreigners have been net sellers of SA equities in September following the trend over the last two years. This is a further indication that despite the improving earnings figures, we are lacking investment into our local market. Although politics may not be the only factor, the uncertainty of what happens after the ANC conference in December and policy direction chosen, plays a significant role in this lack of investment.


As the #GuptaLeaks emails were scrutinized, some big private sector firms got caught in this web and are starting to face the music. KPMG withdrew their findings on the controversial SARS Spy Tape Report that was instrumental in the axing of finance minister Pravin Gordhan. The repercussions were severe as eight senior executives resigned and large firms that used KPMG have taken their business elsewhere. The financial impact could cost KPMG their place as one of our top audit firms with analysts predicting an exit from SA within 24 months.

Internationally, Bell Pottinger and McKinsey are facing the same fate as they came under fire for their ties with the Gupta’s. The US regulators have been alerted on the McKinsey debacle and possible fraud. If they do intervene, that could turn this into a criminal case that may even lead to prosecutions. Not so long ago we saw leaders from Emerging Market countries such as Brazil and South Korea getting sentenced to jail for corruption – so a similar fate may await some of South Africa’s political elite. This could take years to resolve but there is a good chance that we will see some connected individuals and politicians behind bars.

Global Consumer Confidence

In a survey by IPSOS that measures consumer confidence in 24 countries, SA was the only country that recorded a noticeable drop in confidence – down roughly 3%.

Interestingly China leads the pack both in consumer confidence as well as global returns.

In September, business confidence in SA fell to its lowest point in 30 years. Economists point out that to fix our economy, we need to fix confidence. The lack of confidence is also evident in the cash piles of over R1.4 trillion of JSE listed companies according to the Centre of Competition, Regulation and Economic Development. The reluctance of the private sector to invest can directly be linked to the lack of confidence and the uncertain political environment that we are heading into with the ANC Leadership Conference coming up in December.

War of Tweets

Could a war of tweets potentially lead to World War 3?

In recent weeks, North Korea has performed six nuclear tests with the main aim to hit mainland United States with a nuclear tipped missile.

Trump has reiterated that talking is not the answer – indicating that an attack on North Korea could be the only solution. The UN has imposed further sanctions on North Korea that could cost them an estimated $1 billion per year. The effectiveness of the sanctions would rely heavily on China and Russia’s enforcement, which has been lacking in the past.

Underpinning President Trumps’ campaign from the get-go is the “America First” rhetoric – aimed at establishing a sense of nationalism with Americans. Unfortunately this has not translated well – and has caused further division – often interpreted as an America for white supremacists. One can only hope that this doesn’t contribute to full-scale war.

Markets have shown short-term volatility with jumps in safe haven assets such as gold, but there has been no significant market reaction to this as yet. May sanity prevail as this is a major geo-political risk that will hurt returns across the spectrum.

In Summary

Local equity had a very good quarter – up roughly 9% over three months. This was mainly driven by a rally in resources. With all major indices in positive territory, there is more appetite for riskier assets worldwide. There are signs that economic conditions are improving worldwide. Historically when markets are cheap – prices tend to go up. Time will tell whether South Africa can overcome our structural issues and share in the positive global sentiment.