A review of the markets in the first half of 2016

At the half-way mark of 2016, we take note of significant market moves and the macro-economic themes which have been behind them as well as those which remain prevalent.

Global Indices 05 07 2016

It has been a tough six months for global markets with the frequent reminders of an uncertain economic environment tempering market gains. Macro themes that have been and remain prevalent at present are: slowing economic growth, the timeline relating to the rising interest rate cycle in the U.S. and the U.K.’s decision to leave the European Union.

In China, slowing growth remains a very real concern. The region posted quarter one 2016 GDP quarter on quarter growth at 6.7%, its slowest level since quarter one 2009. The rate of growth for the region has now not improved for eight straight quarters.

In the U.S., the tightening of interest rates (which commenced late last year) has been paused for the time being. Despite a short term lapse in the Non-Farm employment figures for May, the region has shown signs of an improving economy. Indications are that the U.S. Federal reserve has renewed a dovish stance in terms of monetary tightening as it remains cognoscente of global affairs despite their local economy showing signs of improvement.

In Europe, markets were surprised at the decision by the U.K. to leave the European Union after 43 years of membership. The full implications thereof are uncertain and will remain so in the uncertainty of future negotiation. A withdrawal agreement now needs to be negotiated and while negotiations are underway, the UK will remain a member of the EU. If the negotiations are not completed within two years, then a forced withdrawal could occur, although there could be a vote to extend the negotiation timeline. Also in Europe, the European Central Bank announced (in March) the expansion of its quantitative easing program in an attempt to try avert the threat of deflation within the Eurozone.

In South Africa, market participants would have been disappointed with quarter one 2016 GDP data which showed a 1.2% quarter on quarter contraction. The economic contraction was led by the mining and quarry segment which fell by 18.1% largely due to significantly lower production in Platinum Group Metals (PGMs) over the period. A second quarter of economic contraction (should it be realised) would allude to a technical recession although recent trade surplus data would suggest a recovery in mining exports might be enough to aid marginal growth in the second quarter.  

A softer dollar has bode well for commodity prices which have started to rebound off their worst levels since the short term lows of the commodity cycle.

Safe haven demand amidst stagnating global growth and economic uncertainty pertaining to the future state of the European Union have seen investors favouring precious metals once again.

Iron ore has found renewed vigour as a sequence of trade balance data from China (by far the largest consumer of the steel making ingredient) has suggested an improving demand for the metal. News that Australian producers of iron ore are managing the levels of supply have further supported the near term prospect for the metal as supply is seen moderating while demand appears to be robust.

Crude oil initially started to gain amidst speculation the OPEC and NON- OPEC producers might look to freeze levels of production this year. While the speculation has not evolved into a realised truth (as of yet), the commodity has gained on other events such as supply outages from Nigeria & Canada as well as evidence that the number of oil rigs in production from the U.S. have been declining. 

The rand has been relatively strong for the year thus far, albeit off a low base following the “Nenegate” scandal in December last year, which had moved the currency to its worst ever levels against the Euro, the Dollar and the British pound.

The rand has benefitted from South Africa narrowly escaping a credit rating downgrade to sub-investment grade status from the S&P and Fitch’s ratings agencies’. Moody’s ratings agency also maintained its credit rating for South Africa at two notches above “junk”, although assigned the sovereign a negative outlook. Investors will now eye the S&P and Fitch ratings reviews in December.

The dollar has remained relatively weak as macro-economic concerns relating to global growth and uncertainty has delayed the timeline of interest rates rising in the world’s largest economy.

The British pound has sold off significantly against most currencies following the decision by the U.K. (through democratic vote) to end the 43 membership within the European Union. 

Resource counters, which were most hated in 2015, have been the outperformers in the year thus far. The sector move has been led by those shares with exposure to precious metals, namely gold and platinum stocks. A weaker dollar, boosting commodity prices has aided the move which has been furthered by safe haven demand for these precious metals. It should be noted that the move follows two years of onslaught within these counters and although gains seem substantial they have occurred from severely depressed levels.

Locally listed South African shares exposed to the U.K. market have been the underperformers for the year thus far with share prices being severely impacted post the EU referendum vote. Capital & Counties, Intu Properties, Brait, Investec, Redefine, Anglo American Plc and Lonmin all have separate U.K. listings and have fallen with the share price settlements in London. Truworths through its recent Office Group acquisition, finds an increased exposure to the U.K., Ireland and German retail markets. Imperial Holdings finds significant exposure to Europe through both its international logistics business as well as its vehicle import and distribution divisions. Locally listed companies with exposure to the U.K. property sector have been the worst hit as the market fears rising loan costs amidst declining property values to follow. The graph below shows the negative moves realised in the first 3 days post the “Brexit” decision being realised. 

Some other locally listed counters, although not making the top ten worst performing list post the EU referendum, although susceptible to uncertainty and risk are as follows:

-The Foschini Group down 9.75% over the three day period, exposed to U.K. retail through new acquisition Phase Eight

-Old Mutual Plc down 9.32% over the three day period, exposed to U.K. banking, insurance and asset management services

-The Mondi Group down 9.07% over the three day period, dual listing in SA and the U.K. 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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