MONTHLY REPORT

Market Update June 2017:

South Africa

The Constitutional court placed the ball back into National Assembly speaker Baleke Mbete’s court, ruling that she does in fact have the constitutional power to prescribe whether a vote of no confidence in the President of the country is allowed to take place via a secret ballot. President Zuma, during a question session in Parliament, was defiant, confident and almost to the point of being arrogant that there is no reason for a secret ballot to take place and he will without doubt survive another vote of no confidence. If a no confidence motion against the president is successful, then his entire cabinet, including deputy ministers, must resign, resulting in a lot of well-paid ministers leaving with the President. The vote is set to take place on the 8th of August, with no sign yet whether it will take place via a secret ballot or not.

The likelihood of a strengthening rand for the remainder of the year is becoming less likely when one looks at the country’s deteriorating domestic fundamentals. The economy is in a technical recession, ANC infighting, corruption and political uncertainty and junk status. During the month, the rand ended relatively flat against the dollar appreciating 0.33% to end the month at R13.07/$. The rand lost 0.98% against the Pound and 1.56% against the Euro.

The SA ten-year government bond weakened by 19bps to close the month at 8.77%.

Precious metals saw terrible results for the month with the Gold Mining Index falling 9.50% while the Platinum Index ended the month flat and has appeared to form a bottom. The Banking index saw a choppy month in and out of positive territory however managed to end the month 1.96% lower.

The Indi25 came under significant pressure during June, ending 4.37% lower after being dragged down by Naspers. The large decline was seen in the beginning of the month with the rest of the month remaining relatively flat. The Findi30 dropped 3.88%, its biggest decline since June 2016. The Retail Index remained under pressure and declined by 3.53% for the month following the 8.56% drop seen in May. This leaves the Retail Index down 19.8% for the year.


Global Markets

Global geopolitical risks are becoming a more dominant theme month after month. Tension between the United States, China and North Korea has increased after North Korea claimed that they had successfully launched an intercontinental ballistic missile (on 4th July) and are closer to having the ability to strike the US mainland than ever before. US markets have however continued their positive rally continuing to reach all-time highs with company earnings supporting the trend. All eyes will now be on second quarter earnings data to see how the companies had performed in the current environment Momentum will soon fade should President Trump fail to implement his policies promised during his campaign.

In the UK, the path to Brexit took a turn after UK Prime Minister Theresa May called for a snap election to strengthen her negotiating power in the Brexit process. That decision backfired on the Prime Minister and saw her lose her majority resulting in a hung parliament. The result saw the Conservative Party increase its share of votes and has increased the possibility of a “soft Brexit”.

The Eurozone saw strong data in the manufacturing sector with it expanding at its strongest pace in over six years. Markit Manufacturing PMI for June climbed to 57.4, up from 57 seen in May. Unemployment held steady at 9.3% in May, the lowest level since March 2009.

FSE Dax TR and Euronext Paris CAC 40 PR returned -2.17% and -3.49% respectively for the month.

Emerging Markets continued their steady upward trend. A slight sell-off was seen towards the end of the month as investors may be taking profit. Pressure on the index may be seen in the near future as developed markets increase interest rates. The MSCI EM 50 NR ended the month higher by 0.76%.

(Source: Market Pulse, TradingEconomics, Bloomberg, ShareData, Morningstar)

~ Warren Davison Market Analyst

Caleo Capital Investment Committee

Market Update May 2017:

South Africa

May was a busy data month in South Africa. Total New Vehicle Sales for April saw a massive from drop from previous months but managed to recover somewhat in May with a reading of 41 783. Looking at over a YoY basis, sales contracted 2.62%. SA retail sales saw an unexpected growth of 0.8% YoY in March, a significant increase from the negative 1.6% seen in February. CPI figured for April were released showing inflation slowing to 5.3%, down from the 6.1% seen in March. The large decrease was mainly due to the slowing in food inflation which has reduced significantly. During the month, we saw the SARB keep interest rates constant at 7%. Manufacturing Production Index YoY for March grew 0.3%, up from the previous reading of -1.6%. A large increase in private sector credit was recorded for April with a reading of 5.9%, beating both previous readings of 4.9% and market expectations of 5.84%. This increase was assisted by household credit which accelerated to 2.9% YoY. Unemployment increased 1.3% to 27.7% for the 1st quarter of 2017, the highest rate since the 1st quarter of 2004. This reading is trending above the long-term historic average of 25.41%.

The rand strengthened 1.79% against the dollar in May. During the month, the rand saw a steady strengthening to end the month at R13.1125/ $. A similar movement was seen against other major trading currencies. The rand strengthened 2.27% against Sterling, however, weakened 1.75% against the Euro.

The SA ten-year government bond (R186) strengthened 11 bps for the month to end at 8.6%. South Africa managed to avoid another downgrade from Fitch as they left its assessment of SA’s debt at BB+, the highest level of non-investment grade. Moody’s currently rates SA at Baa2, which is two notches above non-investment grade, with a negative outlook. Market expectations are for a one notch downgrade which is likely to take place in June.

Precious metals saw terrible results for the month with the Gold Mining Index falling 1.93% while the Platinum Index in particular falling 15.47%. The positive performance in the beginning of the month for the Banking index wasn’t strong enough to keep the index in positive territory as it ended the month 1.42% lower. The Banks Index saw a sharp decline towards the end of the month dropping 4.48%. The Indi25 had a rather flat month ending 0.04% while still maintaining its 14.7% year to date performance. General Retailers Index had a terrible month ending the month 8.56% lower. The index has been under significant pressure with a year to date performance of -6.57% and a massive 14.76% drop from its high in March 2017.

 

Global Markets

Global markets were again moved by political events during May. We saw the wrap up of the French election in the beginning of the month and in the US, news of investigations into the US presidential election made headlines. General market consensus was on the positive side with over three-quarters of the US companies beating revenue estimates. A higher broad-based earnings trend can be seen in the US, pushing the S&P 500 and Nasdaq both higher by 1.41% and 3.88% respectively. Unemployment in the US fell to 4.3%, the lowest level in 16 years.

European markets felt the relief in the French elections as it came to an end. Emmanuel Macron won the elections which meant fears of France leaving the EU have been put on hold. The euro rallied against the dollar during the month ending 3.17% higher at $1.1241/EUR. Volatility was seen in Italy with the likelihood of a general election being held by autumn, shows the region’s political risk and uncertainty.

FSE Dax TR and Euronext Paris CAC 40 PR returned 1.42% and 0.31% respectively for the month.

Emerging Markets were also faced with political noise. Michel Temer, current Brazilian president, is being investigated on alleged corruption charges. The country has seen the worst ever recession and is struggling to break the cycle. China saw Moody’s downgrade their sovereign credit rating due to the increased risk associated with the rapid accumulation of corporate debt. On a more positive side, new trade deals were signed between the US and China to reverse some of the anti-trade laws. The MSCI EM ended the month higher by 2.5%.

(Source: Market Pulse, ForexFactory, TradingEconomics, Bloomberg, ShareData)

~ Warren Davison Market Analyst
   Caleo Capital Investment Committee

Market Update April 2017:

South Africa

On the data front, data released during April was predominantly negative. Business Confidence ending March came in at 93.8, lower than previous readings of 95.5. CPI and PPI YoY ending March came in at 6.1% and 5.2% respectively. On a more positive side, Total New Vehicle Sales for March was higher by 0.88% and Retail Sales YoY ending Feb rose from -2.3% to -1.7%.

The rand strengthened 0.32% against the dollar in April. During the month, the rand strengthened 2.65% to a low of R13.02/$ before giving back these gains towards the end of the month. A similar movement was seen against other major trading currencies. The rand weakened 2.82% against Sterling and 1.82% against the Euro.

The SA ten-year government bond (R186) strengthened 18 bps for the month. Global search for yield is still a driving force. South Africa remains an attractive destination despite the recent downgrades.

Precious metals saw mixed results for the month with the Gold Mining Index falling 1.45% while the Platinum Index rose 0.85%. The Banks Index had a volatile month falling 4.41% before recovering 8.30% to end the month 3.53% higher. The Indi25 had another great month and rose by 5.91%. General Retailers Index had a relatively flat month ending the month 0.30% higher.

Global Markets

Global markets climbed to record highs in April, boosted by expectations of US corporate tax cuts and the relief after Emmanuel Macron made it through to the second round. US indices were all higher for the month lead by the Nasdaq, which has continued its sixth straight month of gains, the longest stretch of monthly gains since May 2013. Earnings season thus far in the US has been strong with 75% of companies beating profit estimates. This has played favourably for market participants as we see these numbers flowing through.

S&P 500 TR, DJIA TR and Nasdaq 100 TR returned 1.03%, 1.45% and 2.76% respectively for the month.

European markets felt the relief in the French elections as Macron made it into the second round. Participants are now focusing much more on Europe as it moves towards a more sustained outlook on performance. Risk areas that could still shock the market are Brexit negotiations, and the French election taking place on May 7th 2017 and the Italian election.

FSE Dax TR and Euronext Paris CAC 40 PR returned 1.02% and 2.83% respectively for the month.

Emerging Markets have continued their outperformance as measured by the MSCI EM index which returned 2.3% for the month. As we have seen, emerging markets are becoming less dependent on commodities as they are producing positive returns during these periods of depressed commodity prices. Although there are emerging market countries which are still reliant on the commodity driven environments, the majority are finding growth in other areas.

(Source: Market Pulse, ForexFactory, TradingEconomics, Bloomberg, ShareData)

~ Warren Davison Market Analyst
Caleo Capital Investment Committee

Market Update March 2017:

South Africa

March was a rather volatile month with President Zuma first recalling Finance Minister Gordhan and Deputy Finance Minister Jonas from their international roadshow and then subsequently initiating a late-night cabinet reshuffle that saw the firing of them both. This has resulted in a significant backlash, with opposition parties as well as some within the ruling ANC calling for Zuma to resign or be removed. We have seen unprecedented public attacks on ANC members by ANC members. Even more significantly, we saw Deputy President Cyril Ramaphosa and other Top Six members of the National Executive Committee publicly disagree with Zuma’s cabinet reshuffle and state that they were not consulted with regarding the changes made. The public outcry on social media has been significant. Various organisations are attempting to arrange mass protest to bring the country to a standstill in order to get Zuma to step down. Parliament was also called on to hold a vote of no confidence in the President. For a vote of no confidence to succeed, a simple majority would be required. The ANC holds 249 seats out of 400 in parliament, with the remaining 151 seats held by opposition parties. A minimum of 50 ANC MP’s would need to support the vote of no confidence for it to be successful. Following the cabinet reshuffle international ratings agency Standard & Poor’s downgraded South Africa’s foreign credit rating to below investment grade while maintained the local credit rating just above junk states. It is largely expected that the other ratings agencies will follow suit shortly.

The ZAR weakened 2.17% against the USD in March. During the month, however, the ZAR strengthened 5.3% before the reshuffle which then saw the ZAR weaken by 7.88% against the greenback. A similar movement was seen against other major trading currencies with ZAR weakening by 3.64% against Sterling and by 3.02% against the Euro.

Given that most of the companies in the TOP 40 Index, particularly some of the heavy weight constituents, have earnings that are generated offshore, ZAR weakness boosts their earnings. Thus, despite the turmoil caused by the cabinet reshuffle, the TOP 40 Index ended March up 2.35% in ZAR terms, driven mainly by rand weakness.

The SA ten-year government bond (R186) weakened by 5bps to close the month at 8.84%, however, the yield hit a low of 8.31% before the reshuffle followed by a sell-off of 53bps to 8.84%.

Precious metals saw some support from the weaker ZAR with the Gold Mining Index rising 4.93%. The Platinum Index had a strong bounce back after the first week and returned 11.72%. This strong recovery however was not enough to push the index into positive territory for the month end ended lower by 1.85%. The Banks Index saw the most pain following the axing of the Finance Minister. The index was up as much as 8.7% before the announcement of the reshuffle which saw the index drop 11% from the intra-month high and ended the month down 3.25%. The Indi25 rose by 4% during the month while the Retail Index ended 2.33% lower.

Global Markets

Quarter 1 of 2017 saw the continuation of strong global equity markets. In the US, there was positive sentiment with Donald Trump becoming president and the potential policy changes he that came with him. Hopes for tax cuts, infrastructure spending and regulatory reform have undoubtedly played a part in the rally since November. Another positive contributor to the continuing bull market that many seem to not pay attention to is the sharp improvement in business and consumer confidence. This recovery from the lows seen in 2015 provided a strong base picking up into 2016 and has provided a secure foundation seen in Q1 of 2017 as company earnings flow through. Consumer spending is a key driving force of growth and should this change, markets will feel the impact further down the line. On the flip side, we have seen markets begin to slow over the past month as there is doubt around the Tax cuts and the recent failure by President Trump to replace the current Obamacare with Trumpcare. Negative sentiment around Trump could cause markets to react, however consumer and business sentiment still remain relatively strong.

S&P 500 TR, DJIA TR and Nasdaq 100 TR returned 6.07%, 5.19% and 12.09% respectively for the quarter.

Good news is also flowing through into Europe with business confidence recording their highest readings in 5 years. Consumer confidence has also been rising steadily and is approaching its pre-crisis levels. With business confidence being so positive, European companies are finally starting to show broad-based earnings growth which has positively influenced markets. Political volatility will persist with all eyes focused on France to see whether Le Pen will take the win and go forward with her anti-euro stance.

The UK saw signs of deterioration in consumer confidence as Brexit weighs in. Business confidence and the small business sentiment however rebound strongly after the initial Brexit vote as what was seen as a large over reaction. Inflation has been picking up sharply since the lows seen in April 2016, putting pressure on real wage growth. Article 50 was triggered to officially commence the process of Britain leaving the EU which will bring extraordinary uncertainty to the UK economy.

FSE Dax TR and Euronext Paris CAC 40 PR returned 7.25% and 5.35% respectively for the quarter.

Japanese data has been reasonably positive, with business confidence rebounding slightly from lower levels seen at the beginning of 2016. Consumer confidence has been trending upwards since 2014. India has also been a strong emerging market this year with positive data being released. Business confidence has been rising significantly and is trading at 5 year highs. Consumer confidence has seen huge amounts of positivity and is trading at its highest levels in 10 years.

(Source: Market Pulse, ForexFactory, TradingEconomics, Bloomberg, ShareData)

~ Warren Davison Market Analyst
Caleo Capital Investment Committee

 

Market Update February 2017:

South Africa

The rand weakened by 2.53% against the USD in February, however still trading comfortably in its bands. The significant R13.25/$ level was broken substantially during the month with the rand strengthening to a level of R12.79/$. This level however wasn’t maintained for long with importers capitalising on this favourable rate. The rand weakened substantially against the Pound and Euro with a result of 4.10% and 4.57% respectively.

The JSE Top 40 Index gave back a large portion of the gains seen in the beginning of the year. The index fell back 3.91% which was largely dragged down by gold and resources counters.

The local bond market gained a further 0.71% in February as the yield on the 10-year spot came down from 8.85% at the beginning of Feb to 8.79%. South Africa’s credit rating is still a topic of conversation. Rating agencies will look at three main issues. Firstly, an improvement in economic growth and fiscal performance. Secondly, weakening institutions would put downward pressure on ratings since it could lead to deteriorating investment climate. Thirdly, risks around Government finances by State Owned Enterprises. As long as economic growth improves in the short-term, and provided there is no institutional deterioration, South Africa can maintain its investment grade rating.

Precious metals continued their strong growth trajectory, with the Gold rising by 3.14% in USD. The Platinum Index also had a strong month gaining 3.09% in USD. The Banks Index had a fairly flat month returning -0.10%. The Indi25 pulled back 1.96% but is still in positive territory year to date with a return of 2.23%.

South African Consumer Price Index YoY for December pulled back to the 6.6% level. The previous 6.8% reading can be seen as the peak of the cycle and with food prices, largely maize, coming down, this should have a positive impact on the CPI numbers going forward. The unemployment rate for the 4th Quarter came in with positive numbers as the rate appears to be decreasing from 27.1% to the latest reading of 26.5%. PPI YoY for January was also recorded with a weaker figure of 5.9%, down from the previous 7.1%.

Global Markets

In the US, large amounts of focus were placed on Janet Yellen and the rate hike decision. The comments started the month off on a very neutral tone, however as the month went on and positive news was released in the US, the tone quickly changed and now the market probability of a March rate hike has risen to 80%. Strong labour market data and rising inflationary pressure were areas mentioned in her testimony. Strong market growth was again seen in equity markets with the S&P 500, Dow Jones, and Nasdaq returning 3.72%, 4.77% and 3.75% respectively.

Within the EU and the UK, the Bank of England kept interest rates on hold at 0.25% which was largely expected by market participants. Forecasted growth for 2017 in the UK was also revised upwards from 1.4% to 2.0%. The Consumer Price Index YoY for January came in at 1.8%, missing market estimates of 1.9%. The Bank anticipates inflation readings to reach 2.7% by the end of the year. Real wage growth will be watched closely as a barometer for the health of UK consumers.

(Source: Market Pulse, ForexFactory, TradingEconomics, Seed Analytics)

~ Warren Davison Market Analyst
   Caleo Capital investment committee

Market Update January 2017:

South Africa

On the South Africa front, focus has been on a potential cabinet reshuffle. There is a strong sense that President Jacob Zuma is considering a reshuffle to make room for the appointment to the cabinet of ministers of his ex-wife, Nkosazana Dlamini- Zuma. This would open the door for Dlamini-Zuma to potentially succeed him as President of the ruling African National Congress and ultimately of South Africa. The concern is that the President will replace those who stood against him at the NEC meeting at the end of 2016 and possibly replace Finance Minister Pravin Gordhan, which could lead to another Nene-gate type event which would have serious consequences for the Rand and the bond market. The President’s State of The Nation address on the 9th of February will be watched closely following which a reshuffle could take place. The rand strengthened by 1.6% against the USD in January, continuing its recent strength against the greenback, and looks set to test the significant R13.25/$ level again. The rand was unchanged against Sterling during the month and appears to be trading at fair value. Against the Euro, the ZAR weakened by 0.72%.

The JSE Top 40 Index had a strong start to the year, rising 4.62%. This was driven largely by resource counters as global commodity prices surged, continuing their strong gains seen in 2016.

The local bond market gained a further 1.3% in January as the yield on the 10-year spot came down from 8.9% to 8.85% at the end of January. This was despite the fact that foreigners were net sellers in the market both of equities and bonds. Positive factors were the improved trade balance of R12 billion in December. The repo rate was left unchanged at 7% with the Reserve Bank remaining reasonably hawkish on any uptick in inflation. Bonds are currently implying inflation of 6.8%, which was the inflation number in December. A possible easing of inflation should be supportive of bonds.

Precious metals were again off to a fantastic start in January, with the Gold Index rising by 10.4%. The Platinum Index had an even stronger month, surging by 23.14%. This is the

biggest one month gain for the index since March 2016. The Banks Index was the worst performing sector during January, decreasing by 4.5% as concerns around a cabinet reshuffle and potential replacement of Finance Minister Pravin Gordhan resurfaced. The Indi25 continued its positive momentum, rising by 4.27% during the month following the 1.75% rise seen in December.

South African consumer inflation for December rose to 6.8% year on year from 6.6% in November. This was higher than expectations and is starting to get to the peak of the inflation cycle. For 2016 inflation came in at 6.4%, up from 4.6% in 2015.

Global Markets

In the US, the Dow Jones Industrial Index and the S&P 500 Index ended the month up 0.51% and 1.79% respectively. This is a positive start to the year for the markets as January is historically a tough month with the five-year trailing average for January being down 1.06% for the Dow Jones and down 0.41% for the S&P 500. The MSCI World Index also saw green gaining 2.7%. The emphasis on global growth assisted emerging markets with the MSCI EM Equity index up 5.5%. Global growth, as measured by PMI indices, appears to be on an uptrend and this is assisting the uptick in global equity markets.

Within the EU and the UK, the focus remains on Brexit, with Prime Minister Theresa May stating in her first speech of the new year that she plans to exit the continent’s single market entirely, but wants to do so on favourable terms and vowed to take control of the number of foreigners entering the UK. The PM revealed her twelve point Brexit plan during the speech and warned the EU that she would walk away from a “bad deal” for the UK, raising the possibility of the UK leaving the EU on default World Trade Organisation rules. Theresa May is planning to trigger Article 50 by the end of March, but this timeline has been put under pressure with the British Supreme Court ruling that Parliament must be given a vote before Article 50 can be triggered and before the formal process of leaving the EU can begin. With the hard line Theresa May has taken, significant uncertainty exists around whether a hard Brexit would be avoided and the substantial risks this poses to the profitability of UK companies. The GBP strengthened 1.94% against the USD in January but most of this move was seen after Theresa May’s speak. It has since then been trading relatively flat against the dollar.

(Source: Market Pulse, ForexFactory, TradingEconomics, Seed Analytics)

~ Warren Davison Market Analyst
   Caleo Capital investment committee

Market Update December 2016:

South Africa

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The JSE All Share index ended the year strongly, closing December up 1.0%. This enabled the ALSI to end 2.6% higher for the year. Financials were the best performing sector, ending the month 3.5% higher, where Barclays Africa and Capitec were some of the best performing shares in December. The strong performance of the resource sector was somewhat halted in December as the index closed the month 3.6% lower. However, resources ended the year as the best performing sector.

Local property increased 4.2% in December, ending the year 10.2% higher. With Bond yields declining, property shares were in demand as they are offering investors attractive yields. The index does appear expensive compared to bonds, but a portfolio can be constructed that has a higher one year forward yield than the 10 year bond yield. By eliminating some of the more expensive properties, a portfolio can be constructed with a forward yield of between 10% and 11%, which is reasonably attractive in the current environment.

South African consumer inflation for November rose to 6.6% year on year from 6.4% in October. This was in line with forecasts and should mark the peak of the inflation cycle. With the Rand strengthening by almost 3% in December and food price inflation lowering, we expect to see a decrease in the CPI for December. The Reserve Bank has decided to leave interest rates unchanged, with the repo rate remaining at 7%.

With the likely economic growth coming through and GDP expected to increase to around 1% in 2017, we can expect the Reserve Bank to raise interest rates to keep in line with expected higher global interest rates in 2017.

The rand had another strong month in December and closed at R13.69 from November’s closing price of R14.09 against the US Dollar. The rand strength was on the back of South Africa avoiding a sovereign debt downgrade to junk status. The rand ended 2016 11.5% stronger against the US dollar, after losing more than 33% against the dollar in 2015. The rand also strengthened by 26% against the Pound. On a pure purchasing power parity basis, it continues to be undervalued against a basket of currencies. Against the Sterling, however, it trades at fair value.

In general, South African bond yields ended the month lower, in contrast with global bond yields which ended December higher. The yield on the R186 declined from 9.02% to 8.9%, contributing to the ALBI returning 1.6% for December and 15.5% for the year 2016. Local bonds ended the year as the best performing asset class, followed by Property, Cash and lastly Equities.

Global Markets

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The momentum in US equity markets established in November was maintained in December as the Dow Jones Industrial Average rose another 3.4%. The Dow Jones ended 2016 16.5% higher, while the S&P 500 advanced 12.0%. The FTSE 100 index in the UK was up 14.4% in pounds, but was down 0.2% in US dollars following the pound’s devaluation in 2016 in the aftermath of Brexit. 2017 will likely see stronger economic growth, particularly in the U.S., accompanied by higher inflation. That will probably lead to higher long-term interest rates, with the Fed expected to hike rates two or three times in 2017, and further dollar strength. As a result, bond yields should rise, with returns subsequently lower. Equities should benefit from a better earnings outlook, but might see multiples fall because of a higher discount rate.

Global bond yields continued its higher trend in December. After the Fed decided to increase US interest rates at their December policy meeting by 0.25%, and expectations that interest rates will increase further in 2017, global bond yields are likely to continue edging upwards to a higher long term average rate. The yield on the US 10 year bond closed December at 2.5%. After a strong start to 2016, the JP Morgan Global Bond Index lost some steam towards the end of 2016. The index lost more than 8% over the last 3 months and ended the year only 1.6% higher.

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(Source: Market Pulse, ForexFactory, TradingEconomics, Seed Analytics)

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update November 2016:

South Africa

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November was a busy month with rating agencies having their say on the South African economy. Moody’s, Fitch and S&P all maintained their investment grade status however the outlook was downgraded to negative, from stable across the board. Should South Africa show no improvement from current levels within the next 12 months or so, the concessions is that a downgrade is likely.

Despite the relief by rating agencies, the JSE All Share has been on a steady decline since its highs in June. The index returned -0.75% for the month and is sitting around -0.96% year to date. The Rand is currently trading in a channel between R14.71/$ and R13.18/$. We first saw the currency hit this support level on 10th August 2016 and has been in the channel since then.

Recently we have seen data released showing the SARB’s leading business cycle indicator ticking up from 93.3 to 94.4, reaching a 12-month high and CPI inflation also ticking up to 6.4%, from 6.1% previously. Growth forecast for 2016 remained unchanged at 0.4% while growth for 2017 and 2018 is seen at 1.2% and 1.6% respectively.

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On other Emerging Markets front, a change in investor sentiment towards EM has been driven by concerns over the stronger US Dollar. Trump has extensively talked about renegotiating trade deals and removing those deals which are unfavourable to the US. The Institute for International Finance (IIF), which monitors equity and debt fund flows, identified the second-biggest weekly outflow from emerging markets on record in the middle of November.

These outflows have also been felt in South Africa. Over the past rolling 12-month period, annual outflows of SA stocks and bonds were a massive R138 billion, far exceeding the R80 billion during the previous 2008 global financial crisis. If we discount the current number by 6% for 8 years we R86 billion or more than the 2008 outflows like for like. Despite this our currency has appreciated during the course of this year.

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Europe and UK

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In the UK, Phillip Hammond, conservative party, delivered his first Autumn Statement as chancellor. Growth prospects are seen to rise in 2017 with new infrastructure plans. UK productivity growth was also focused on and should also see a boost with the increase in infrastructure.

Italy saw the constitutional referendum being held on Sunday 4th December 2016 were votes were asked whether they approve a constitutional law that amends the Italian Constitution to reform the composition and powers of the Parliament of Italy. The result was a majority ‘NO’ vote which can be seen as a negative vote of confidence in prime minister Matteo Renzi and his coalition government. He in turn resigned after losing the vote.

US

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Over the past 10 months, both US equity markets and bond markets have been delivering positive returns for investors, a situation which doesn’t often happen. However, this trend quickly reversed in November. Government bonds fell 2.8% in November, their worst month since January 2009 while US equity markets continued to run gaining 3.7% for the month.

Markets were rather cautious ahead of the US presidential election in the beginning of November. After a Donald Trump victory surprised markets, investors shifted their focus to what will be expected from Trump administration. The potential for tax cuts and infrastructure spending boosted equity markets over the November period. The economic growth driver is expected to shift from a monetary policy to a fiscal policy under Trump’s leadership. More infrastructure spending and tax cuts should boost growth in the US for 2017 which should flow through positively for stock markets.

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(Source: Bloomberg, Market Pulse, ForexFactory, TradingEconomics

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update October 2016:

South Africa
October was a tough month for markets with the JSE All Share declining -2.62% for the month. This flat low volatility trend has been the case over the past 8 months and part of the greater sideways movement that we have seen since August 2015. Resources were seen to be the largest decliner with -3.8% for the month while inflation bonds were the best performer at 0.7% for the month.

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Finance minister, Pravin Gordhan, delivered the medium term budget which doesn’t normally gain too much attention however, markets did react negatively to the news. S&P described the MTBPS as neutral, but says it would have liked to see more details on structural reforms, particularly as regards the state-owned enterprises. Fitch issued a strong statement in which it highlighted the weak growth and its crippling affect it will have on the budget. It also stated lack of meaningful reform to boost growth. Statements like this tend to lead one in a direction closer to junk status. The risk of a rating downgrade remains ever present with political noise and “Fees must Fall” protests scaring off foreign investors. However, on balance with the NPA withdrawing charges against Gordhan and a good enough budget speech that had clear elements to hold off rating agencies, the probability of a rating cut for now has certainly slimmed and we are likely to see more of the can being kicked down the road, as we saw earlier in the year.

The Rand over the past few months has been strengthening substantially against other major currencies with some technical analysis indicating further potential strength. With the above being said and that we are currently on the multiyear depreciation trend line, now would be a good time to start buying offshore currency while the Rand is trading at these favourable rates.

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Europe and UK
In Europe, UK GDP q/q surprised on the upside increasing 0.5% beating market expectations of 0.3%. However, the UK continues to sort through the implications of the referendum. The month of October saw new lows for the Sterling with a flash crash occurring on the 7th. The Sterling lost 6% overnight, down at one stage 10% against the dollar. The general weakening of the pound is making UK exports attractive and giving the UK economy a boost. The FTSE 100 TR performed well in the month return an amount of 1.03% and 15.32% year to date.

Over in Europe, Eurozone GDP growth managed to hold its ground at 0.3% q/q, in line with expectations. Manufacturing PMI also produced good results with a reading of 53.3 beating expectations of 52.7 with Spain, Germany and France all positively adding to the result. Inflation in Europe has remained relatively flat over the past 12 months and produced a result of 0.5%, up from 0.4% in August. Even at 0.5% inflation is now at a highest level in over 2 years. This has primarily been driven by higher energy prices.

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With the above being said, the large sell off of the Pound presents a good opportunity to buy Sterling. Fundamentally, London will remain a powerhouse and a key driver of the United Kingdom and although the future trade agreements are uncertain, we don’t see any fundamental problems.

US
Third quarter GDP figures showed the economy expanded at an annual rate of 2.9%. The driving factors for this was mainly seen in consumption with strong contribution also seen in exports (10% surge in the quarter) and inventories. The positive data her confirms the views of many hawkish Fed members and adds strength to the argument that the FED will be comfortable hiking rates in December. Markets are pricing in a 70% chance that the FED will hike rates.

All eyes are on the 2016 US election campaign taking place on Tuesday November 8th 2016. The S&P 500 showed a slow decline of nearly 2% over October as market participants are nervously awaiting the outcome. With either party being elected, there will likely be a lowering of volatility across markets but the true impact will only be felt months down the line once the elected party implements their strategy.

4_october

(Source: Bloomberg, Market Pulse,ForexFactory, TradingEconomics)

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update September 2016:

Quarter 3 was a strong month for the majority of world markets. The strong run was led by the MSCI Asia ex Japan (USD) returning 9.38%. Emerging Markets came in close with a return of 8.10% for the three months.

South Africa
Local equity markets for quarter bucked the trend in Rand terms with the FTSE/JSE All Share returning an amount of 0.48%, however converted to USD it is largely in line with a Dollar return of 7.01%. This strong return is due to the rand performing rather well over the quarter with a return of 6.82%. Over the long term the fair value of the USD/ZAR comes in around R15.58/$ and this is where we saw a strong support level.

1_august

Student Protests have been getting worse with no party coming to a conclusion. With this being said, universities are threatening to shut down indefinitely meaning the remaining academic year could be lost completely. This will place immense pressure on the system with hundreds of thousands of matriculates looking to enter.

Rating agency, S&P is also concerned that the political tension in SA is making economic reforms more challenging and must be watched. Konrad Reuss, S&P MD for sub-Saharan Africa said, “We clearly stated that there is concern that the political tension stifles the reform effort, so that must be watched”. Minister of Finance, Pravin Gordhan has been working hard to keep rating agencies happy and managed to keep South Africa from being downgrade. Looking forward however this task may be more challenging as he constantly has the Hawks investigating him and making his job that much more difficult.

Europe and UK
The major focus of European markets over the quarter was around the banking sector. Bank shares took a large knock post Brexit but quickly snapped back to a higher position compared to the beginning of the quarter. It is rather unlikely that the large banks in Europe will fail in the near future. The European Central Bank (ECB) has commenced its corporate bond purchasing program and this is likely to continue until March 2017.

With the UK leaving the European Union, this is causing additional risk in the Eurozone with countries like Italy also calling for a referendum on constitutional reform. The large fall in sterling has helped support UK equities. Global equity markets also recovered post Brexit with investors seeing the decision as more local than a global matter. Surveys show that businesses are significantly more cautious and less likely to invest in the UK following the referendum. Consumer confidence and PMI surveys however have rebounded after falling in the month after the vote.

2_august

US
Consumptions remains the engine driving the US economy and with payroll number having grown on average by over 200 000 per month, the economy appears to be on a solid footing with upward growth going forward. Consumer confidence and the housing marker both show large amount of improvement with consumer confidence rising to new post-crisis highs and the housing market reporting new home sales up 20% over the last year and house prices up 5%.

Volatility for the remainder of the year will be seen with the final stages of the US Presidential elections as well as the potential rate increase in December. If we look back to January, predictions by the FED were for four rate hikes. The market had significant reservations about this and as we know this plan was far from carried out. This quarter saw the US central bank delay rates yet again leaving the last chance for December. Janet Yellen, Fed Chairwoman, however did make a more positive remark stating that with the strong economic data, the case for a rate rise had “strengthened in recent months”.

Unemployment claims for the month of September ended strong coming in with a reading of 252K beating both forecasts and estimates.

Asia
With the Bank of Japans inflation rate at -0.5%, their big announcement over the quarter was to aim to overshoot its 2% inflation target. The BOJ also promised to keep 10 year yields on Japanese government debt at 0.0%. This is to help the financial sector and to prevent the flattening of their yield curve.

3_august

(Source: Bloomberg, Market Pulse,ForexFactory, TradingEconomics)

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update August 2016:

August was another calm month for global equities with majority markets trading very close to zero for the month. The FTSE 100 and the DAX returned 0.85% and 2.47% respectively while the S&P 500 and the JSE All share index performed negatively both at -0.12% in their respective currencies.

South Africa
The Rand performed terribly against major currencies for the month of August losing ground of 6.14% against the USD, 5.43% against the GBP and 5.96% against the EUR. These wide spread loses were mainly due to the criminal allegations and threats placed against Pravin Gordhan during the month. Instability around the ANC and large public companies are also causing slight uncertainty in the South African markets and pushing the rand weakness further.

Retail sales YoY released disappointing results of 1.7%, dropping from previous readings of 4.5% and missing forecasts of 3.8%. CPI figures also missed forecasts of 6.1% and came in at 6%. On a brighter note, PPI YoY beat expectations of 6.85% coming in at 7.40%.

1_august

Europe and UK
BOE cut the official bank rate from 0.50% to 0.25% while UK CPI YoY came in at 0.6% beating expectations of 0.5%. The UK Ave Earnings Index increased to 2.4% from previous readings of 2.3%. UK retail sales showed positive signs on a month on month basis coming in at 1.4% beating forecasts of 0.1% as international consumers sought to take up bargains after the weakening of the currency post Brexit.

Q2 GDP came in in line with expectations at 1.6% YoY while CPI dipped further to -0.6% MoM for July but maintained the YoY figure of 0.2%. Unemployment was maintained at 10.1% however expectations were for a slight reduction to 10% flat.

2_august

US

Highlights for the month was Fed Chair Janet Yellen’s speech at Jackson Hole indicating that the markets have performed well and that chances for a rate hike before the end of the year are looking better.

Core Durable Goods Orders for the month ended higher at 1.5%, beating previous readings of -0.4%. Consumer Confidence also came in stronger at 101.1 showing a positive sign for the direction of the economy.

Commodities
Gold appears to have reached its resistance level at around $1 366.00 and has since then been on a steady decline losing 3.13% in August. On the energy front, Brent Oil has had another strong recovery gaining 10.79% in August ending at 47.04/bbl. The $50/bbl still remains a key level as oil struggles to break through.

3_august

(Source: Bloomberg, Market Pulse, StatsSA, ForexFactory)

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update July 2016:

Markets rebounded substantially in July following the Brexit led sell-off towards the end of June. Most equity markets are now above or at pre-Brexit levels. The strong bounce back was led by the DAX (6.8%), TOPIX (6.2%) and the S&P 500 (3.6%), all in their respective local currencies.

1_july

South Africa
With investors searching for yield in emerging markets, money flowing has caused substantial strengthening of EM currencies. The Rand appreciated substantially over the quarter largely due to the inflows into local bonds as well as investors avoiding Turkey due to the strain it is experiencing. With developed market bond yields remaining compressed for the foreseeable future, market participants are seeking yield elsewhere. Business confidence Index has increased to 95.1 from previously of 91.8, this is seen in the data released by StatsSA with positive numbers flowing through. Retail Sales YoY also saw a huge increase to 4.5% from 1.6%.

2_july

Europe and UK
Brexit and Banks (Financials) dominated the markets for July. A leading indicator of economic health is the Purchasing Managers Index (PMI), this data was released for the UK and as expected, came out worse than previous figures. Manufacturing PMI and Services PMI came in at 49.1 and 47.4 respectively, indicating contraction. With the fall in the sterling, all hope is not lost as there are signs of a pick-up in export growth resulting from the cheaper currency. UK prelim GDP q/q grew by 0.6%, beating forecasts of 0.5%. The Bank of England held off changing monetary policy in July, waiting for more definitive signs of economic slowdown before they react.

European PMI held its group in July with Composite PMIs for Germany and France coming in around 55.3 and 50.0 respectively. The European Central Bank’s Bank Lending Survey showed continued positive demand for credit in the consumer, housing and corporate space. European banks were hit hard in the July with financial shares dropping 15.5% since the start of the year. This large drop is mostly due to balance sheet concerns and profitability of medium to large sized banks. Italian banks have still been a big issue and as August approaches, there has been no agreement yet between Italy and Europe to recapitalise these banks.

3_july

US
The US continues to move forward but at a much slower rate than before. Advance GDP q/q came in around 1.2%, missing expectations of 2.6%. The Federal Reserve also saw no change to the interest rate in its July meeting, although they have kept the possibility of a September rate hike on the cards. Should markets not produce the steady stream of economic data required, the Fed can quickly reverse its tone on the US economy.

Consumer Confidence has come on positive at 97.3, beating estimates of 95.6. A factor adding to the confidence is the positive earnings results released by many S&P 500 companies. Earnings-per-share has seen to have positive growth over the past year.

Commodities
Looking at commodities, precious metals continued to gain during the monthly of July returning 2.22% and 27.35% year to date in USD. Brent crude continues to trade between the $40 – $50/bbl ending the month at $42.46/bbl. It did however lose ground in July dropping 14.53%.

4_july

(Source: Bloomberg, Market Pulse, StatsSA, ForexFactory)

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update June 2016:

South Africa
South African markets felt the effects of Brexit with the FTSE/JSE All share ending 2.79% lower for the month. The economy appears to have slowed in the first quarter with GDP QoQ and YoY dropping to -1.2% and -0.2% respectively. Retail sales YoY also slowed from a previous figure of 2.9% to 1.5% with business confidence falling from 82.5 to 79.3. On a more positive note, total new vehicle sales were up 6.23%, Manufacturing Production Index Yoy was up to 2.9% and the Rand strengthened substantially against all major currencies, 15.31% against the GBP, 6.58% against the EUR and 6.87% against the USD for the month of June.

1_june

United Kingdom and the US
The Brexit referendum dominated headlines over the past quarter with the UK’s final vote to leave the European Union taking place. The full implications of this decision will not be fully know for some years to come. The heightened uncertainty around the UK economy and political situation is likely to have substantial negative effects on the domestic economy. Although some hiring decisions and investments are likely to be stalled, there are plans to slash corporate tax to less than 15% in an effort to encourage businesses to stay. Companies that have EU employees will also have two years to sort out work permits as companies will try retain hardworking staff. UK growth going forward is likely to be lower than expected due to the uncertainty but overtime new trade agreements will be put in place and the UK economy will continue to run its course. It is important to note that the UK accounts for only 4% of global GDP. Although this has caused a ripple affect felt throughout the world and seen in global stock markets, it is unlikely that this event will cause a global recession. However, should this lead to job cuts outside the UK, a recession could then follow. An increase in unemployment rates will have a negative effect on consumer confidence, spending and in turn result in more job cuts causing a vicious cycle that could lead to a recession. With this being said, unemployment claims in the US remain largely unchanged for the month of June with a result moving from 267K to 268K. With a rebound in the oil price and a slowdown of the dollar rising, US corporate profits are expected to rise and this would result in economic growth and jobs to continue to grow. Final GDP q/q came in at 1.1%, beating expectations.

Europe
With the UK being out of the EU, growth forecasts appear to be weaker by around 0.5%. This exit has greater consequences for the EU as reflected in market movements. Italian banks are under enormous pressure in the markets. We at Caleo Capital are watching these developments closely. The European Central Bank however continues to stand behind Europe’s recovery and its bond purchasing programme.

2_june

Commodities
Another strong month for commodities with silver performing the best in this class for the month (17.09%) as well as year to date (35.25%). Brent Crude remained relatively flat for the month (-0.28%) ending slightly lower at $49.68bbl. Gold returned 9.15% for the month and 24.58% on a year to date basis.

3_june

(Source: Bloomberg, Market Pulse)

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update May 2016:

South Africa
The Rand weakened substantially ahead of the S&P rating, depreciating by 10.39% during the month of May. The Top40 performed well in line with global market and had a positive finish for the month. The All Share returned 1.79% for the month and is sitting around 6.34% for the year. This was supported by industrial shares which rose 5.09%.

1_may

Equities
Global markets had a strong return and are predominantly positive across the board on a year to date basis. The S&P 500, FTSE 100 and the Nikkei 225 returned 0.85%, 0.46% and 5.7% in their respective local currencies for May.

2_may

Fixed Income
Global government bonds have rallied across the board this year. Japan and the UK have led the way as worries over the economic future of both countries have taken centre stage.

3_may

Commodities
Commodities have had a strong bounce back on a year to date basis but appear to have reversed during the month of May. Brent Crude was the only positive performer with a return of 9.55%. Palladium lead the losers with -10.07% followed by Silver and Gold returning -8.20% and -5.55% respectively on a 1 month basis.

4_may

(Source:)

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update April 2016:

Introduction
Momentum in global markets has seen to slow in April as investors are not convinced the fundamentals have improved significantly, however risk concerns have also been paired back.

Central banks have yet again been a topic of discussion. The Federal Reserve is in a self-declared rate hike cycle, but managed to ease its policy stance when the FOMC pushed out expectation of future hikes. The Bank of Japan and European Central Bank both moved further into negative rates while the Bank of England maintained overnight leading rates at 0.50%.

Oil has recovery significantly with approximately $10bbl in April alone added to the short term futures contracts prices after bottoming in mid-February. The supply has started to decline, particularly in the US while there is evidence of better growth in China indicating demand may be improving.

South Africa
The South African Rand strengthened drastically during the month of April after the Concourt ruling and towards the end of the month the high court ruling against President Jacob Zuma. Part of the gain was however due to the weakening dollar of late. Political infighting dominated the news during the month with more and more calls for the president to step down both by the opposition and ANC stalwarts. There are also the continues media battle between new but old finance minister Pravin Gordon and zuma aligns.

The stronger Rand should help imported maize prices given the low yield from the drought. Prices are now feeding into meat prices given the lack of yellow maize, while water shortages have also caused major issues for meat and dairy farmers.

Inflation dropped to 6.3% in April after spiking at 7% the month before, still above our 6% top band but a welcome relive and a surprise on the downside. South Africa continues to face a stagflation scenario with growth only at 0,6%, high unemployment and high inflation.

Europe
Markets bounced back in April with the DAX 30 returning 0.74% and the FTSE 100 returning 1.08%. Purchasing Managers Indexes (PMI), cannot improve fast enough for the European economy, slowing slightly to a reading 53. GDP growth averaged 1.6% in the 1th quarter, annualised, with this trend looking to continue. However inflation outlook remains weak with expectations now as low as 0.2% for 2016. The ECB made decisions in March to push the deposit rate further into negative territory, increase its QE program to 80 billion euros and to include corporate bonds into the purchasing mix.

The UK market has been dominated by the Brexit referendum fears. Financial markets have priced in some of the risk however over the course of the month traders have downgraded the likelihood. This can be seen mainly by the volatility and general weakness in the exchange rate this year. The currency has, since its low in February, bounced back and regained all loses year to date, indicating that investors are increasingly less concerned about the referendum. Apart from this, the economy has been showing more signs or weakness. The GDP growth slowed to an annualized rate of 2.1% for the first quarter, the slowest pace in more than three years. Manufacturing has dipped recently. while inflation has picked up to 0.5%.

US
The rebound of risk assets that has taken place over the past four months would be somewhat more convincing if growth forecasts had followed suit. Purchasing Manager Indexes (PMI) have shown slight improvements coming in at 51.8, up from the previous months reading of 49.5. Durable Goods and Consumer Confidence both missed their forecasted marks coming in at 0.8% (1.9% forecasted) and 94.2 (95.8 forecasted).

The US economy was weaker than expected in the first quarter with an advanced estimate of 0.5% for the quarter after last year’s 4th quarter of 1,4%. This lead to an annualised return of 2% rather than expectations of 2,3%. Personal consumption (two-thirds of the output), was stronger than expected. Personal consumption rose 1,9% despite personal saving increasing 0.2% to 5,2% for the first quarter.

Jobless claims have been below 300 000 for 60 straight weeks now, the longest streak since 1973.

China
More positive numbers came out of China shown by the PMI beating forecasts of 49.3, coming in at 50.2. Industrial production, Retail sales and exports also showed improvements in market conditions. The stimulus project undertaken by the government has showed increases in fiscal spending, accelerated credit supply and easing access to housing finance which in turn should show an increase in housing prices. GDP growth has been in line with expectations showing an annualized rate of 4.5%. Should they wish to hit the 2016 growth target of 6.5%, the economy will have to average a growth rate of 7% for the remainder of the year.

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update March 2016:

Introduction
March was another measured month with most markets continuing to recover or stabilise, after the sharp selloff’s in the opening of this Quarter. Volatility was driven primarily by global growth concerns, particularly China and the falling oil price which feeds lower inflation and generally weak global demand. Oil prices however are being driven by oversupply and structural issues, not demand. Additional stimulus from the ECB and a more dovish tone out of the Fed help restore some order to the globe.

1_march
South Africa
While equity markets had a rough time, the Rand was on one serious roller coaster with massive moves seen in short periods of time. Thankfully, although volatile, the trend has been downward since mid-January and over the month of March. With mounting pressure from rating agencies and the recent ConCourt ruling, South Africa may have turned a corner however it is still early days. Transparent and clear political stability is key along with renewed interest in development reforms to spur growth in our stalling economy.

2_march
US
After fears started in January of a slowing, even heading to recession, economy with jobless claims edging up and weak manufacturing data alongside the hawkish 4 hike tone from the Fed, the US has moved full circle. Non-Farm payrolls surprised on the upside at the end of March with Manufacturing and manufacturing prices following suit. A more realistic glide path, in terms of rates, is now expected from the Fed that has had a more dovish, although positive tone of late. Given their drastic change in tone and outlook, the market has certainly discounted their credibility. In general, data out of the US has largely been positive or showing continued improvement with inflation continuing to pick up and real wage growth starting to come through.

Europe
The ECB, although expected to do something, far exceeded expectation with an aggressive ramp up of Quantitative easing. A further EUR20Bn will be purchased monthly with the scope of purchases now including non-financial investment grade corporate debt. This will lead to a significant change in the corporate bond market and see a compression of the risk margin.

Unemployment rates continue to decline with purchasing managers indices remaining constant. The main issues remain falling consumer confidence and the lack of inflation with it currently sitting at -0,1%.

Brexit fears continue to drive the UK markets with the June referendum looming. While current expectations seem to indicate that the UK is unlikely to vote to leave (+-35%), current estimates would indicated that the UK growth rate would halve going forward from an estimated 2% to 1%. This uncertainly has caused many investors to sit on the side-line, clearly evident in UK equities yielding 4%, which is very attractive by international standards.

China
China continues to drive global volatility and emerging market sentiment as it transitions its economy. While economic growth is slowing it is not collapsing and certainly cannot be described as a hard landing. Industrial production growth has slowed to 5,6%, whiles retail sales continues to drive higher at 10% y/y. The probability of a Chinese recession is growing, however this needs to be put in context of the growth we have seen from the region in the past decade. Even China will move through economic cycles.

(Source: Bloomberg, Business Insider, Reuters, Fin24, BusinessDay)

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update February 2016:

Budget Speech 2016: Turbulent Times

South African Finance Minister Pravin Gordhan started on a strong note stating, “We are strong enough, resilient enough and creative enough to manage and overcome our economic challenges”. Weaker business confidence coincides with severe drought, bring with it rising prices and threats to water supply in many areas.

The effects on our economy due to global demand declining are widespread. Lower export earning, revenue, job losses and declining investment are just to name a few.

He pledged to narrow the fiscal deficit to 2.4% of GDP in three years time from the current 3.9% and to stabilise debt as percentage of GDP around 45% of GDP. This was not enough to appease investors seeking more determined measures to boost revenue, including tax increases and sales of state-owned companies. Personal income tax rates were not changed as was expected and the VAT rates was also kept unchanged. Other key points were that Capital Gains Tax will increase significantly with almost 20% to a maximum of 16.4% for individual (up from 13.7%) and 22.4% for companies (up from 18.6%). Fuel levy will increase 30 cents per litre, property transfer tax and sin taxes are all seen to be increasing and a new tyre levy and tax on sugar intake will also be introduced.

1_feb_BUDGET

Gordhan stress that the budget is “focused on fiscal consolidation,” He also stated “We cannot spend money we do not have. We cannot borrow beyond our ability to repay. Until we can ignite growth and generate more revenue, we have to be tough on ourselves.”

Debt has almost doubled since President Jacob Zuma came into power in 2009, when the economy was facing recession and market turmoil linked to the global financial crisis.

2_feb_BUDGET

The rand plunged against major currencies sliding 3.13% (R15.71/$) against the dollar and 2.43% (R21.87/£) against the pound.

3_feb_BUDGET
(USDZAR: 1 Day Chart)

Other highlights were that they have agreed to “explore the possible merger of SAA and SA Express, under a strengthened board, with a view to engaging with a potential minority equity partner, and to create a bigger and more operationally efficient airline.” He did stress that this would be not be privatisation.

Confidence and shared understanding have been reinforced. These engagements are clearly critical to boosting our economy. Proposals for joint action have been established which include a collaborative initiative to combat corruption and abuse of tender procedures.

(Source: Bloomberg, Fin24)

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update January 2016:

Introduction
January 2016 has seen a rocky start to the year with the MSCI World Index and MSCI EM returning gross returns of -5.96% and -6.48% respectively for the month, levels last seen in 2009. Over the past period, the main focus has been on the price swings of Oil with sanctions being lifted, Central bank policies and China’s economy and financial markets. These themes have been the main factors moving markets in 2016 thus far.

World Stock Market Returns (Local Currency)

1_jan
(29th January 2016)

South Africa
South African markets overall had a rough start to the year in line with Global markets. The Top 40 finished the month in the red at -3.78% and the top performing class was JSE Gold finishing the month at 34.9%.

The MPC decided to increase the repo rate on January 28th by 50 basis points to 6.75% pa and the prime rate increased to 10.25%, its second consecutive hike aimed at stopping the depreciation of the Rand and high inflation.

The manufacturing output for South Africa measured by the production index came in at -1%, better than previous -1.7%. Business Confidence decreased to 79.6 also down from previous figures of 82.7.

Top performing sectors for 2015 on the JSE are:

  1. JSE Industrials (15.75%)
  2. JSE Top 40 (4.16%)
  3. SA Listed Property (2.45%)

2_jan
One Year top40 index

Eurozone
European markets performed in line with other majors with the DAX, CAC 40, FTSE 100 and STOXX Europe 600 returning -8.80%, -4.75%, -2.54% and -6.59% respectively in their local currency. Positive news on the other hand came out of the United Kingdom with their prelim GDP q\q coming in at 0.5% which was in line with market expectations and CPI y/y beating expectations coming in at 0.2%. Other news coming out of the UK was their manufacturing PMI at 51.9, missing expectations of 52.8, however even though this has missed expectations it is still above a reading of 50 which indicates industry expansion.

Mario Draghi assured markets after the ECB’s January meeting that he would consider further action at the next policy announcement in March and he added there are “no limits” on how far they’re willing to deploy measures within their mandate. Interest rates were kept unchanged during the meeting by the Governing Council.

US
US GDP growth slowed in January with a figure of 0.7%, lower than the previous figure of 2.0%. Core durable goods orders m/m also came in with negative results at -1.2% and Core CPI m/m at 0.1%.

After the Feds January meeting, they have kept monetary policy unchanged and have put a spotlight on its March meeting. The Committee decided to maintain the target range for the federal funds rate at 0.25 to 0.5%. The monetary policy stance remains accommodative, thereby supporting further improvement in labour market conditions and a return to 2% inflation. Due to this, market expectations about additional rate rises have dropped.

3_jan
One Year S&P 500,

Asia
Chinese growth data was not strong in January, nor was it particularly bad. GDP q/y came in at 6.8%, slightly missing expectations of 6.9% and Industrial Production y/y slowed to 5.9% from previously 6.2%. As we can see by the numbers above, growth in China is slowing but the important thing is that these numbers are still positive. This is confirmed with manufacturing PMI coming in at 49.7 which indicates contraction.

A rebalancing is seen from an investment-led to a consumption-led growth and this is seen by the retail sales growth reading. Although sales growth came in at 11.1%, less than the previous 11.2%, this is still seen as a positive for the market.

The Bank of Japan (BoJ) released their outlook report on Friday, January 29th and in a surprise move they cut the deposit rate into negative territory and if necessary they indicated room to go further. Markets did react to this news but it wasn’t enough to recover losses experienced earlier in the month.

4_jan
One Year USDJPY,

Oil
Oil over the past few month has taken over headlines and has been a major force affecting global markets.

Additional boost to supply and global oil inventories remain overwhelming with the lifting of the Iranian sanctions. Supply considerations is seen to be the driving force behind the declining oil price and not any significant changes in the global demand. As we see oil remaining at these lower levels, other negatives will be seen in the short term with headline numbers for corporate earnings coming in less than expected.

5_jan
One Year Generic 1st CO Future, Brent Oil

(Source: Trading Economics, Bloomberg, Forex Factory, JP Morgan)

 

~ Lloyd Priestman Market Analyst
~ Warren Davison Jnr Market Analyst
   Caleo Capital investment committee

Market Update October 2015:

Introduction

October saw equity markets perform strongly with most developed market indices bouncing back into positive territory for the year. Stock exchanges across the world displayed great strength in October after the previous volatile months. Emerging equity markets also displayed positive returns with the MSCI Emerging Markets Index moving up 7.13% (USD).

Oil prices bounced between $52.65 and $46.81/bbl with Generic 1st ‘CO’ Future closing at $49.56 and returning 2.46% for the month.

Longer term economic outlooks and shifting central bank policy expectation was the focus for the month which lead to lower market volatility at 15.07. Investors waited for monetary policy announcements from the European Central Bank (ECB), the US Federal Reserve (the Fed), and the Bank of Japan (BoJ). While these banks made few changes, it was the language and signalling that really mattered for markets.

asset-class-and-style-returns

South Africa
The South African Rand has remained under pressure during the month of October ending at R13.82/$, R0.03 stronger than Septembers close. The month was dominated with headlines from Lonmin and MTN. A rights issue of $400 million was announced by Lonmin (world’s third-largest platinum miner) in order to ‘save’ the company while MTN was slapped with a $5.2bn fine by Nigerian authorities regarding SIM card deactivation.

South African markets performed well against global equities with the MSCI South Africa at 7.19%, the MSCI World at 7.95%, and the MSCI Emerging Markets at 7.13% in USD for the month.

Top performing sectors year to date on the JSE are:

  1. JSE Industrials (17.35%)
  2. JSE Financials (11.71%)
  3. SA Listed Property (10.77%)

one-year-top40-index
One Year top40 index

Europe
Markets reacted to the dovish tone by Mario Draghi, EBC head, as the bank continues to debate whether further action will be required to achieve its inflation plus 2% target. The ECB’s is likely expand or extend its quantitative easing (QE) program in the near term. Should they implement further QE, steps to follow would be that the program would extend past its target end date of September 2016, expand the amount purchased each month, cut deposit rates further into negative territory or a combination of these. European CPI fell in October to 0% for its 0.1% level in September. French Flash Manufacturing PMI of 50.7 beat forecasts of 50.2 showing signs of industry expansion.  The MSCI Europe Index for the month of October performed higher at 7.17% (USD) and 2.08% (USD) year to date.

US
The Federal Open Market Committee (FOMC) met on Wednesday, 28th October, and announced there would be no change in rates which was in line with forecasts. There were a few changes with regards to the tone of the meeting with emphasis on international concerns being reduced and the Fed also explicitly noted the possibility of increasing interest rates at the next meeting. US jobless claims have fallen even further, with the monthly average now at the lowest level since December 1973 with 255 000 claims filed in the week ending 10 October. October 22nd saw unemployment claims at 259 000 beating estimates of 266 000.

The US economy continued expanding through the third quarter with the advance GDP q/q increasing 1.5%. This rate however missed expectations of 1.6%. However inventory levels decreased significantly over this quarter. Manufacturing weakness will be an area of Fed and market focus with core durable goods orders m/m (-0.4%) missing forecasts of 0.0%. Employment Cost Index q/q increased 0.6% from the previous 0.2% showing a gradual pick-up in wages. The mixed data released in October made it difficult for the Fed to decide on a rate hike making the December meeting all the more important. The S&P 500 had its best month of the year gaining 8.4% on a total return basis in October.

one-year-sp500
One Year S&P 500,

Asia
Several policy changes have been made by the Chinese MPC. The Chinese slowdown has caused ripples through global markets. The MPC are determined to manage the slowdown and economic growth is expected to stabilise near 6%. Chinese inflation printed weaker than expected with CPI rising only 1,6% year on year in September, down from 2% in August.  Producer prices slide further for the 43rd month further fuelling global deflationary fears with PPI falling 5.9% year on year. Chinese imports also fell 17.7% in September, while exports fell 1.1%

BoJ governor, Haruhiko Kuroda, spoke on October 16th where he kept his bullish attitude on inflation and growth. 30th October saw the BoJ’s outlook report and press conference where Kuroda did not modify its asset purchase programme. Tokyo Core CPI y/y matched forcasts at -0.2%

Warren Davison Jnr Market Analyst
Caleo Capital investment committee