The first quarter of 2016 was a turbulent, albeit positive, period for global markets. After one of the worst January months on record, which sent investors fleeing in the pursuit of less risky assets, markets made an abrupt turn midway through February and this positive trend continued through much of March. The sheer volatility that has driven large deviations in asset prices has not been easy to stomach, and there is no indication that the roller-coaster ride will be coming to halt any time soon.
Despite an interest rate hike in March, local markets enjoyed a strong positive month which pushed quarterly returns into positive territory across the board. Local markets have seemingly benefitted from increased investor risk appetite that has come as a result of more monetary easing in Europe and less intent to raise rates in the US. Most notable over the quarter was the gain in resource shares which was driven by considerable gains in the US dollar price of precious metals(particularly Gold) in the first two months of the year in what was an uncertain time for global markets.
Some key events in March 2016:
The Monetary Policy Committee(MPC) of the South African Reserve Bank raised rates by 0.25% to 6.75% in an attempt to curb inflation which is forecasted to peak in last quarter of the year at 7.3%.
Political events continue to take centre stage, and the Constitutional Court’s judgement on Nkandla has thrown the proverbial cat amongst the pigeons with calls for the president to resign mounting. The judgment highlighted that “President Jacob Zuma failed to uphold, defend and protect the Constitution”, and the news was received positively by markets.
The US dollar price of Oil was up by 10.1% in March, with the price nearly at the $40 per barrel mark.
The Rand appreciated against major currencies in March, particularly against the US dollar(7.9%)
Below are the index highlights for March and the first quarter:
The All Share Index had a strong month, posting a return of 6.4%. This pushed year-to-date(quarterly) returns into positive territory up 3.9%.
· Small and mid-cap shares continued their impressive run in 2016, with monthly returns of 8.3%and 8.5% respectively. This brings the quarterly return for mid-cap shares to 18.8%, which was largely mirrored by the 18.1% gain in resource stocks. Indeed with many resource counters now concentrated in this segment of the market; rising precious metal prices as result of an uncertain global economic environment was a key driver of strong mid-cap share returns over the quarter. Harmony Gold led the way, with an inordinate return of 239.9% return for the quarter. The larger cap stocks, as measured by the FTSE/JSE All Share Top 40 Index, also showed healthy gains in March gaining 6.1%, but were only marginally positive for the quarter(1.5%). Large gains in the financial sector which was up 11.5% for the month was the primary driver of positive monthly gains in the large-cap sector. On a quarterly basis, large cap performance was dampened somewhat by the underperformance of the rand hedge sectors, which is unsurprising given the strengthening of the Rand over the quarter.
Dovish rhetoric from US policy makers and additional monetary easing in the Europe resulted in increased risk appetite which drove strong gains in local stocks in the month of March. Looking at the top 60 stocks on the FTSE/JSE All Share Index; the largest gains came from Impala Platinum (28.0%), Imperial Holdings (21.3%), and Sanlam(20.9%). the biggest declines came from Gold Fields(-10.6%), Curro Holdings ( -7.6%) and Net 1 Ueps( -6.1%). In addition, some of the larger rand hedge stock returns were depressed by a relatively strong Rand over the month and quarter.
The MSCI World Index had a fine month posting a US Dollar return of 6.9% in March, recoupling some of its losses from January and resulting in a flat return for the quarter( -0.2%). All major markets experienced US dollar gains in March as optimism returned in a pendulum like fashion. This performance was largely mirrored by the S&P 500 – the index’s largest contributor – which was up 6.8% and 1.4% for the month and quarter respectively. In the UK, the FTSE 100 was up 5.0% for the month bringing the quarterly return to -2.4%, while Japan’s Nikkei Index returned 5.8% and -5.0% for the month and quarter respectively. Germany’s primary market was the standout performer in March, with a US dollar return of 10.1%, but still ended the quarter down 2.7%. It must be noted that the recent strength in the Rand dampened foreign asset returns for South African investors.
Emerging markets were the main beneficiaries of a more ‘risk-on’ investment environment in March, as fears relating to a considerable economic slow-down in China abated somewhat. The MSCI Emerging Markets Index gained 13.3% in US Dollars, bringing the year-to-date returns from the MSCI Emerging Markets index to 5.8%. The strong monthly gains on the index were mimicked by the strong returns in the Chinese market, with the Shanghai Composite Index returning 13.1% for the month; however the year-to-date return of -14.8% indicates the effect of the frenzied sell off earlier in the year.
Despite an interest rate hike of 0.25% in March, the All Bond Index(ALBI) showed a healthy gain of 2.6% for the month benefitting increased risk appetite. Indeed this was the trend for the quarter, which saw positive inflows of R17.2Bn into South African bonds, resulting in a gain of 6.6% on the ALBI for the quarter.
Somewhat surprisingly, listed property was one of the standout performers in March. The sector returned 9.5% for the month, bringing its quarterly gains to 10.1%. A rate hike in March did little to dull returns in the sector, and in the bond market for that matters as long term bond yields actually fell. The idea of prolonged expansionary global monetary policy has seemingly led investors back to the pursuit of risk.
Cash returned 0.6% for the month bringing the quarterly gains to 1.7%.
Commodity prices continued their recovery in March. Most notably, the US dollar price of Oil was up 10.1% on the back of improving global macroeconomics and the possibility of supply cuts. The US dollar price of a barrel of oil is now just below the $40 mark, representing an increase of 6.2% for the year. Gold has been a top performer this year. Most of the quarterly gains in the US dollar price of Gold(16.7%) came in the first two month of the year, with the price flat for the month of March(0.2%). Platinum showed strong gains in March(6.2%) which resulted in a quarterly gain of 12.4% in the US dollar price of the precious metal.
From a foreigner’s perspective, the Rand was actually quite strong over the quarter, recovering from the lows experienced in 2015. It ended the month 7.9% stronger against the US dollar, 4.3%stronger against the Sterling and 2.4% stronger against the Euro. For the quarter the Rand appreciated by 5.7% against the US dollar, 8.7% against the Sterling and 0.4% against the Euro.