The quarter ending 31st August 2016 was one where locally the Borse and the Rand were reactive to the political pressures to which South Africa has been subject. The “fight” between Jacob Zuma and Pravin Gordhan continues to cause volatility in our currency. This discord and uncertainty impacts negatively on both local and international investor’s confidence, which can be seen from deterioration in the capital value of some of the domestic South African stocks. The losses the ANC suffered in the financially larger Municipalities may be a catalyst for some changes within the ruling party. Despite this however, in the short term it looks as though Jacob Zuma is entrenching himself further and has his eyes firmly set on the management of the SOE’s (State Owned Enterprises). This is the exact opposite of Pravin Gordhan’s mandate in his attempts to tighten the purse strings with the particular focus of stamping out corruption and the elimination of wasteful expenditure. Recently we have seen big business, including some of the larger financial advisory entities, ceasing investment into these SOE’s until they have clarity, transparency and effective controls put in place, and this shows good business support for Pravin Gordhan.
In spite of these combined efforts, the rating agencies, as a result of the instability and a downwardly revised growth forecast to less than 1% is causing focus to return to a down grade situation of the South African economy to junk status. This will have far reaching and negative effects both on the currency and on our market, as the borrowing costs of an already indebted Government will increase, and as a result thereof increase inflation. Treasury, spearheaded by Pravin Gordhan, will continue to focus on avoiding any downgrade and it remains to be seen how successful they will be during the next quarter.
In the United Kingdom the post referendum results and that of a surprise exit (Brexit) from the EU (European Union) caused extreme volatility in what is a fairly stable zone. The exit vote saw a weakening of both the FTSE100 and of the Pound which conversely caused the Rand to strengthen significantly, post our peaceful local South African elections. However, subsequent to this referendum vote, the decisive and swift action taken by the UK Government and their formation of a new cabinet, coupled with the Bank of England’s (BOE) good fiscal policies have seen the Pound stabilize and the FTSE100 increasing past pre Brexit values. The majority of the FTSE100 companies have a Dollar earning component, meaning that in Pound terms their earnings have been enhanced and with good yields available on some of these stocks versus a recently reduced interest rate, shares are now looking more attractive than deposit. Due to this, we believe the value of the FTSE may be supported for some time to come. There are numerous challenges facing the new Government under Theresa May, and the exit from the EU will not be a swift process, particularly when it comes to re-negotiating trade deals with other countries.
The United States continues to have robust earnings from their larger companies and the recent dovish tones from Janet Yellen with regards to interest rates show that there is unlikely to be a significant rise in interest rates in the short term. Despite this we could see continued Dollar strengthening, however, one must take into account the election race between Donald Trump and Hillary Clinton where we could see Dollar weakness during the run up to the United States elections in November.
The balance of the EU countries struggle to absorb much of the fallout from the refugee crisis, which has been a long and lingering process and unlikely to change in the short term.
China continues to grow albeit at a more moderate pace and as a result has had a knock on effect in dampening demand for resource and oil stocks. We believe that in the long term both the Chinese economy and the demand for resources will increase and correspondingly the recovery prospects in these sectors are good.
We have recently undergone a fairly intensive onsite inspection from the Financial Services Board (FSB) and I would like to take this opportunity to thank all staff and clients who were involved in this process, both pre and now post this audit. There are continued changes to our regulatory authority in South Africa with dissolution of the FSB and creation of two new authorities going forward.
The roll-out of Common Reporting Standards (CRS) also requires us to collect further tax information on all investors. Coupled with this there is a proposed roll-out of a voluntary disclosure program to be undertaken by the South African Reserve Bank and SARS from October this year. Investors need to ensure that their tax affairs are up to date as globally there will be a cross sharing of information between tax authorities from next year. We will continue to keep you updated on any tax or regulatory changes.