Global trade tensions and volatility weigh on the JSE in March
A surge in volatility, the sell-off in US tech shares and the possibility of a trade war weighed on global markets in March as US President Donald Trump’s move to impose tariffs on Chinese goods (and China retaliating by announcing tariffs on c. 130 US products), rattled markets. Trump’s criticism of Amazon, the Facebook data breach scandal and the possibility of US government regulation of the tech sector also conspired to pull markets lower. For March, the Dow Jones Industrial Average lost 3.7% MoM (its second straight negative month after February’s drop which followed a 10-month rally) and was down 2.5% for 1Q18. The S&P 500 fell 2.7% (-1.2% for 1Q18) and the Nasdaq, like the Dow and the S&P, also posted its second straight monthly decline (-2.9%, its biggest monthly drop since January 2016). For 1Q18, however, the index is still up 2.3% - its seventh straight quarterly gain and, according to CNBC, its longest winning streak since a 10-quarter rally that ended in 2015.
In a widely expected move, the US Federal Reserve’s Open Market Committee (FOMC), at its first meeting with Jerome Powell at the helm, raised interest rates by a quarter point last week. In terms of economic data, US consumer price inflation (CPI) rose in February with annual inflation moving closer to the Fed’s 2% target and its strongest level in 12 months, which could encourage further rate cuts this year. In addition, February’s personal consumption expenditure (PCE) price index (the Fed’s preferred inflation gauge), advanced 0.2% MoM and 1.8% YoY. Excluding the volatile food and energy categories, PCE also rose 0.2% MoM but by 1.6% YoY (its highest level in 10 months).
Stocks in Europe closed higher last week on the back of a rally in the auto sector driven by Renault. This followed a report on Reuters that the company could merge with Nissan (the firm has declined to comment on the report). However, this was not enough to reverse the losses experienced during the month and most major European markets closed lower MoM. Germany’s Dax fell 2.7% MoM (-6.4% for 1Q18) and France’s CAC dropped by 2.9% MoM (-2.7% for 1Q18). In the UK, the FTSE 100 lost 2.4% MoM and is now down 8.2% for the quarter. On the economic data front, Germany's March unemployment figures came in at a record low of 5.3%, while the UK's current account deficit, at GBP18.4bn in 4Q17, was well below analyst expectations. However, euro area annual inflation dropped to 1.1% in February, down from January’s 1.3% and well short of the European Central Bank’s (ECB’s) target of just below 2%.
In Asia, Japan's benchmark Nikkei 225 Index ended March 4.1% in the red (-7.1% for 1Q18), while in China, Hong Kong's Hang Seng Index dropped by 2.4% MoM (+0.6% for the quarter) and the Shanghai Composite Index declined 3.0% MoM (-4.4% in 1Q). Growth in China’s manufacturing sector picked up more than expected in March (as government lifted winter pollution restrictions and steel mills increased production), with the country’s official Purchasing Managers’ Index (PMI) rising to 51.5 in March, from 50.3 in February - well above expectations and the 50-point mark separating growth from contraction. The Bank of Japan’s quarterly Tankan survey showed that the headline index for large manufacturers’ confidence retreated by 2 points to plus 24 in March, with non-manufacturers' sentiment also worsening by 2 points to plus 23 in March.
On the commodities front, Brent crude rose 6.8% MoM after surprisingly large drawdowns in US crude stockpiles, while the gold price advanced by 0.5% and platinum ended the month 5.3% down at $930.28/oz. Iron ore spot markets were lower on the back of subdued China construction activity and some production limitations along with concerns around the possible impact of global trade tensions.
Global market jitters saw the FTSE JSE All Share Index ending the month 4.9% lower (down 6.8% in 1Q18). Market heavyweights such as Naspers, FirstRand, Glencore and BHP Billiton, which together account for c. 31% of the JSE’s total market cap, all posted MoM declines (down 11.6%, 9.5%, 7.4% and 3.8% MoM, respectively), on the back of lower international markets and weaker commodity prices. The lower resources prices pulled the Resi-10 2.9% down for the month (-4.4% for 1Q), while Industrials closed 6.0% in the red (-9.2% in 1Q) and financials, down 4.4% MoM (and 1.8% in the quarter), gave back most of February’s gains.
Locally, optimism around newly sworn-in President Cyril Ramaphosa continued to contribute to the SA economic recovery as investor and consumer confidence improved. Ramaphosa has been moving quickly, first reshuffling his cabinet in February and firing (or demoting) several Jacob Zuma allies while also reinstating Nhlanhla Nene as finance minister. National Treasury also took the politically fraught decision in its 2018 budget to raise value added tax (VAT) for the first time in 25 years - a move seen by investors and ratings firms as necessary. Finally, in late-March, Ramaphosa suspended another key Zuma ally - head of the SA Revenue Service (SARS), Tom Moyane.
Meanwhile, on the economic data front, 4Q17 GDP growth reached 3.1%, while the SA economy grew by 1.3% YoY in 2017 – better than National Treasury’s expected 1% growth. The strengthening economic activity over 2017 was partly driven by a bumper maize crop and a recovery in other agricultural commodities following one of the worst droughts in SA’s history. Headline consumer price inflation (CPI) slowed to 4.0% YoY in February from January’s 4.4% according to Stats SA data, while MoM CPI advanced to 0.8% from 0.3% in January. Core inflation, excluding the volatile food and energy categories, was unchanged at 4.1% YoY, while headline CPI quickened to 1.1% MoM from 0.2%.
More good news came as SA escaped a third junk rating when Moody's affirmed its investment-grade credit rating and revised the country's credit outlook to stable from negative. Moody’s said that a weakening of national institutions was gradually being reversed under the new ANC leadership, supporting an economic recovery.
In a move welcomed by debt burdened consumers, the South African Reserve Bank (SARB) cut its benchmark interest rate by 25 bpts last week (the first since July 2017). SARB Governor Lesetja Kganyago said that since the previous Monetary Policy Committee (MPC) meeting, risks to the local inflation outlook have subsided somewhat as the currency “… reacted positively to domestic political developments in the past months and was given further support following the recent sovereign credit rating announcement,”. MoM, the rand retreated slightly against the greenback – down 0.4%. The rate cut also provided some respite to consumers under mounting pressure following the 1% VAT increase (effective 1 April) and the hike in the petrol price.
Retail-focused Polish property Group, Echo Polska Properties (EPP) was March’s best-performing share, rising 24.8% MoM. The company released FY17 results last month, reporting distributable earnings of EUR76.6mn or distribution of EUc10.87/share - ahead of its own previously stated guidance. The Group also updated its FY18 DPS growth guidance range to 6.7%-8.6% (previously 7.5%-8.5%). Net Asset Value (NAV excluding deferred tax) increased by 39% YoY to EUR928mn equating to NAV/share of EUR1.32 - up 16% YoY.
In second spot, construction Group, Murray & Roberts rose 23.7% MoM, buoyed by reports that it had been awarded new underground mining projects in the North American and Australasian markets to the value of R3.80bn. However, news that the company had advised its shareholders to take no action in connection with the buyout offer made by Aton, which it said was opportunistic, and made at a time of unprecedented share price weakness, capped gains towards the end of month.
Another property company, Hammerson Plc, was March’s third best-performing share, rallying 21.9% MoM after rejecting a GBP4.90bn offer from French shopping centre operator, Klépierre. The Guardian reported that Klépierre was trying to thwart Hammerson’s GBP3.4bn tie-up with Intu which would create the UK’s biggest property company worth GBP21bn. The deal, announced in December, would bring together Hammerson’s Bullring shopping centre in Birmingham and Brent Cross in London with Intu’s Trafford centre in Manchester.
Harmony Gold Mining, Sirius Real Estate and African Rainbow Capital (ARC) Investments advanced by 19.1%, 18.8% and 12.3% MoM, respectively. Harmony CEO, Peter Steenkamp has in recent months spoken of exploring options to realise value from its Papua New Guinea undeveloped project, which will cost the Group and its Australian partner, Newcrest Mining $2.83bn to bring into production over a five-year period. Sirius said in early March it had completed the acquisition of a business park in Schenefeld, Germany, for c. R221.5mn, including acquisition costs. Sirius, which owns a portfolio of branded business parks in Germany said Schenefeld had c. 42,000m² of multi-purpose office and warehouse space and was acquired at a European Public Real Estate Association net initial yield of 7.8%. Black-owned investment holdings company, ARC reported its maiden interim results in March, which showed healthy growth in key portfolios, despite “difficult trading conditions”. Co-CEO Johan van der Merwe told Moneyweb that ARC started with investments of c. R4.4bn transferred into the listed vehicle and c. R4.3bn raised from outside of this. He noted that, after revaluation, the portfolio is worth R7bn, making it a total NAV of c. R9bn for the business currently.
In its 1H18 results, healthcare services specialist, Afrocentric Investment Corp. (+11.1% MoM), said that its healthcare services revenue increased to R1.44mn from R1.30mn posted in 1H17, while its diluted HEPS rose 24.6% YoY to ZAc21.67. Last week, the company announced the acquisition of a 51% stake in low-cost medical insurance provider, Essential Group, which uses apps and back-end technology to offer basic monthly cover for as low as R250.
Netcare Ltd. And poultry producer, Astral Foods both advanced 9.8% MoM. Netcare rallied last week after the hospital group announced in a trading update, that it has decided to exit the UK market and pursue the disposal of its interests in the GHG Group. Astral said in early March that “sshareholders are advised that both EPS and headline EPS for the six months ending March 2018 are expected to be at least 410% up on the results for the comparative period.” Finally, rounding out the top-10 performers, Balwin Properties ended March 9.0% in the green.