Tuesday, 04 August 2015 - 20:00
Seed Weekly - Market Update
BCA Research make the comment that, “There is little mystery about what is going on: the global economy is grappling with the fallout from not just the end of the debt supercycle, but from the end of the commodity supercycle as well.”
These two main factors definitely drove both local and global markets in July, which went on to be a very volatile month.
Local equities managed to end the month in the black – up 0,5%. This was despite the JSE Mining shares declining 8,5% in the month and down 12% for the year to date. This sector has dragged down the JSE All Share return to just 6,2% for the year to date.
In July the local Reserve Bank took a pre-emptive step with short term interest rates - raising the repo rate from 5,75% to 6% in mid-July. This is despite low economic growth and inflation at reasonable levels.
The increase in short term interest rates did not help the local currency, which fell to a multiyear low against the US dollar, falling to R12,65/ dollar at the end of the month.
However local long bonds ended a losing streak and the All Bond index gained 1% for the month. For the 7 months to the end of July, local bonds are up 2,6%. This is still below cash returns for the year to date of 3,65%.
Local property shares also bounced up from a couple of difficult months. The local property index gained 5% in July and 12,1% for the year to date. It remains the best performing asset class for the year.
The large drop in a range of commodity prices put the mining sector component of the market under pressure. Gold shares were very hard hit, declining almost 22% for the month.
Some of the main points on the global markets included:
• Greece came every close to a default on its debt, coming perilously close to an exit from the EU. While this is still not totally out of the question, the fallout from a Greece default may have reasonably limited implications on a global scale. But the ongoing problems are indicative of the dangers of highly indebted nations that have been unable to trade out and renegotiate their high debt levels.
In mid-July Greece and European creditors agreed to a further 86 billion euro bailout, still to be approved by parliament and all European member states.
• Commodity prices continued to fall sharply in July. The Bloomberg Commodity Index dropped 11%, the biggest decline since 2011.
Platinum continued to slide – trading below $1000 from over $1500 a year ago.
Gold traded to a new 5 year low dipping below $1100/oz. This from over $1300/oz. a year ago. The 6,5% decline in July was the biggest drop since June 2013.
A range of other metals also fell sharply. Oil is down in price, as is iron ore prices.
• Chinese growth rates have slowed. Leveraged investors started selling and the Chinese Shanghai index fell 14,3% for the month. Still for the 12 months it is up 66,4%.
• Emerging market currencies were under pressure in July with most of them falling further. The currencies of commodity exporting countries such as Australia and Canada also declined further against the US dollar.
• Emerging market equities were also under pressure. The MSCI Emerging Equity Index retreated by 7.26%.
• The US S&P 500 index gained 1,97% in July and is up 3,3% for the year to date. All of the gains in the S&P 500 so far this year are attributable to only two industries: health care and retail. The healthcare sector gained over 14% year to date.
These are just some of the highlights for the month and year to date. Because of the extremes in market moves with some asset classes like commodities and related resource shares falling very sharply, it has been important to have had low exposure to this asset class. At some point these prices will settle and turn, but currently they are indicative of a low growth world, with excess capacity, low inflation in general and low demand. This despite the monetary authorities’ ongoing attempt to reflate asset prices.
Ian de Lange
Tel +27 21 914 4966
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