After a year of near-zero returns, the JSE made a good comeback in 2017, with the All Share Index returning 21% for the year. The JSE was down 0.3% in December, hampered by the Steinhoff scandal after it lost more than 90% of its market value. Industrials and financials outperformed, with the latter showing strong performance in the second half of the year.
One would expect this performance to be backed by stronger economic fundamentals, however, the opposite was true. The South African economy contracted an annualized 0.7% in the first three months of 2017, following a 0.3% contraction in the previous quarter, entering a technical recession. Furthermore, SA was downgraded to junk bond status, President Zuma reshuffled the cabinet in March and again in November, and the unemployment rate reached a 13-year high.
The disconnect between market performance and economic fundamentals is mostly explained by index heavyweights Naspers, Richemont, BHP Billiton and Anglos’ contribution to index performance. Together these counters make up more than 40% of the All Share Index, and we estimate that more than 90% (18% out of 21%) of the index performance can be attributed to their performance.
Despite ongoing tensions between North Korea and the US, political turmoil in Spain (Catalan separation) and inconclusive German elections, we saw a strong bull market globally. World markets as reported by the MSCI All Country World Index, returned 24.6%, led by strong performance in emerging markets and the US. The biggest surprise was the Nikkei, which reached a multi-decade high, ending 21.3% higher.
Except for iron ore, which started 2017 on a high base, commodities trended higher, supported by a weaker US dollar and an uptick in global trade. Brent crude, gold and platinum ended the year 17.7%, 13.6% and 3.6% higher respectively, while Rhodium shot the lights out, ending 122% higher.
Consumer inflation decelerated to 4.6% y/y in November from 4.8% in the previous month. The slowdown mainly stemmed from the transport category as the fuel price inflation eased to 7.9% y/y from 10.8% in October. Monthly, consumer prices increased by 0.1%, driven by increases in the food and non-alcoholic beverages as well as transport categories. Core inflation, which excludes the cost of food, non-alcoholic beverages, petrol and energy, slowed to 4.4% y/y in November from 4.5% in October.
The South African trade surplus increased to R18 billion in November, the highest in 18 months as exports expanded at a faster pace than imports. Exports were 11.5% higher led by precious metals and stones (21%), base metals (19%), and vehicles and transport equipment (16%) while imports increased only 3.3%. For the January to November period, exports increased 7.6% while imports remained unchanged, shifting the country’s trade balance into a R64.74 billion surplus from an R11.2 billion gap in the same period of 2016.
The Federal Reserve raised the target range for the federal funds rate by 25 basis points to between 1.25% to 1.50% during its December 2017 meeting, stating that the labour market has continued to strengthen and that economic activity has been rising at a solid rate. The FOMC believes that the monetary policy stance is still accommodative and will support the labour market as well as a return to 2% inflation on a sustained basis. Inflation is still below 2% on a 12-month basis but is expected to reach the target over the medium term. US consumer inflation accelerated to 2,2% y/y in November from 2.0% in October as gasoline prices increased at a faster pace.
The Bank of England’s MPC unanimously decided to maintain the bank rate at 0.5%. This is after they raised rates from 0.25% to 0.50% in November. The MPC believes that inflation is close to its peak and will slow towards the 2% target in the medium-term after increasing by 3.1% y/y in November. UK consumer inflation at 3.1%, which is the highest it has been since March 2012, was driven by the transport, leisure activities, restaurants and hotels, housing and food categories. Over the month consumer prices increased by 0.3%, driven mainly by a sharp price increase in the clothing and footwear category.
Third quarter Japanese GDP growth decelerated to 0.6% from 0.7% in Q3 but exceeded the 0.3% growth forecasted for the period. Net exports and private and non-residential business spending added 0.5 and 0.2 percentage points respectively. Household consumption expenditure shaved off 0.3 percentage points. On an annual basis, the Japanese economy expanded by 2.5%, comfortably beating expectations.
Economic highlights for the month:
- South African consumer price inflation decelerated to 4.6% in November from 4.8%
- South African trade surplus reaches the highest level in 18 months
- The South African economy expanded an annualised 2% on quarter ending September
- Manufacturing production in South Africa increased 2.2% y/y in October
- US Fed raises fed funds target rate by 25bps to between 1.25% to 1.50%
- US unemployment rate stood at 4.1% in December 2017, unchanged from the previous month’s 17-year low
- Eurozone industrial production increased by 3.7% y/y in October from 3.4% previously
- The Bank of England decided to leave rates unchanged at 0.5% in December
- Japanese economy expanded 2.1% y/y in Q3, significantly better than what was expected