Market Solutions – September 2016

By Alexander Forbes Investments on Oct 14, 2016 in General Market and Economic Commentary The news

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Global:

Benefiting from the advantages of EU membership comes with a price, two examples being Norway and Switzerland who remain outside the EU but have access to its market by contributing to its budget. Adopting this arrangement would see Britain experiencing a “soft” Brexit.

Local:

Local equity markets continue to experience a monthly outflow of foreign capital, with September’s outflow (≈R13 billion) noticeable relative to the previous two months. Foreign flows into local bond markets edged up slightly this month by approximately R1.9 billion.

Global

Brexit hardens

World markets have shrugged off the imminent divorce between the UK and the European Union (EU). Global equities are up 5.4% for the three months to September, incidentally a similar performance achieved by European equities in the same period, but UK counters were up 4%, all in United States dollar (USD) terms. British Prime Minister Theresa May intends invoking Article 50 of the EU treaty by end of the first quarter next year. Maximised access to the EU market in conjunction with full sovereign independence and the right to not contribute to the EU’s budget are being sought by May. Such objectives appear contradictory – benefitting fully from access to the EU market without incurring the costs of participation and not being subject to EU law and regulations appears unlikely.

Benefiting from the advantages of EU membership comes with a price, two examples being Norway and Switzerland who remain outside the EU but have access to its market by contributing to its budget. Adopting this arrangement would see Britain experiencing a “soft” Brexit. The alternative “hard” Brexit will ensue if Britain desires to remain fully independent. British exports to the EU market account for about 44% of total exports, with any barriers preventing such trade likely to increase the costs of doing business with the EU.

Oil turns over a lower barrel

The Organisation of the Petroleum Exporting Countries (OPEC) intends to reduce oil production later this year to provide some relief to the relatively low oil price environment. The price of oil per barrel weakened significantly after June 2014 and the price has proved slow to return to higher levels. Details of trimming oil production by up to 700 000 barrels a day are to be decided at OPEC’s next formal meeting at the end of November 2016. Although such a decision will amount to less than a 2% reduction in the total supply of oil the world over, markets responded bullishly to the news, with oil returning 6.4% for the month.

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Local

Credit rating looms

Locally, equity markets were largely at in the quarter (0.5%) with a strong performance from bonds 3.4% (15.0% YTD), despite a likelihood of a downgrade later in December. Resources edged past Financials and Industrials for the month, returning 4.5% and leading the super-sector basket on a YTD basis with a mammoth 35.9% return. The build up to rating agency Standard & Poor’s decision on the country’s credit rating status later this year is becoming increasingly topical. Several stockbroking houses suggest a downgrade is likely on both local currency-denominated debt and foreign currency- denominated debt, with the market appearing to have priced in such risk, particularly in bonds. Political risk appears vital in the decision to downgrade, with fundamental economic variables such as growth and price expectations possibly being peripheral to such a decision – for example, Turkey’s downgrade followed a failed coup.

Local equity markets continue to experience a monthly out flow of foreign capital, with September’s out flow (≈R13 billion) noticeable relative to the previous two months. Foreign flows into local bond markets edged up slightly this month by approximately R1.9 billion. These figures continue to signal persistently reduced favour towards local markets as we move closer to a credit rating decision.

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Alexander Forbes Investments

Alexander Forbes Investments

Alexander Forbes Investments was established in 1997. We are a forward-thinking and trusted global investment provider, with roots in Africa. In pursuit of certainty we set out to understand our retail and institutional clients’ circumstances and risk tolerance to set clear goals. Our adaptive investment approach, called Living*Investing allows us to maximise opportunity and minimise risk at every stage of the investment cycle.

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