Market Analysis - February 2018



As we warned in the January market report, conditions looked ominous for global stocks in February. A selloff in the last week of January continued into February, sparked by what some saw as a very confusing narrative. This was an unexpectedly good employment report in the US, which investors took fright at because it suggested that the Federal Reserve would hasten its programme of gradually increasing interest rates in 2018 to counter what were assumed to be higher inflationary forces. So, as we have seen so often in world markets, what seemed to be good news suddenly turned into bad news.


A similar situation played out in South Africa. The JSE continued its January decline on the back of jittery global markets, proving once again that more than 80% of the local index’s movements can be traced directly to activity on the New York Stock Exchange. See this link for more detail on the subject:

As for domestic factors affecting the JSE, there was incredible turmoil leading up to the ANC elective conference, the resignation of Jacob Zuma, and the eventual election of Cyril Ramaphosa as head of the party and finally also president of the country. At that stage one might have expected some measure of calm to return to the JSE, but it didn’t turn out that way. After the cabinet reshuffle and soothing noises made to the ratings agencies, many foresaw the rand strengthening and stocks rising but just the opposite happened.

As we move into March, there are no particular grounds for either extreme optimism or pessimism. Markets continue to be flat, with perhaps a slight negative bias as we wait and see if Ramaphosa’s New Dawn actually has legs.

Among asset classes on the JSE in February we have to single out property, which continued its abysmal performance, mainly due to extremely negative analysts’ reports on the Resilient group and a sharp selloff by risk-averse investors.


As can be seen from the table below, international markets performed poorly in February, in many instances dragging down their overall returns for the year. European and UK stocks were hit particularly badly and sentiment towards that geographical sector remains ugly. Hong Kong and Japan, after showing strength in the past six months, sold off heavily. US markets, as we have mentioned, didn’t take kindly to the threat of higher inflation and hence higher interest rates -- no matter that the economy in the US is performing perhaps better than expected under President Donald Trump.

Overall, February was a volatile month which saw some key indexes dip into correction territory, meaning a fall of at least 10%. Fortunately there was some degree of a recovery but anxiety continues to permeate the market after such a long period of unprecedented complacency. In the March report we will deal with the latest unsettling factor, which is Trump’s threatened trade war against China.




Turning to the JSE equity indices, Banks and investment houses made a welcome return to form with a positive return of 2.5%. FirstRand, Investec and RMB Holdings fill the list of the Financial index’s top six performers. Beyond that stellar showing, however, the rest of the market was disappointing. Small caps were up a negligible 0.3% but everything else was down. Consumer Goods collapsed 8% as JSE companies with most of their earnings offshore came back to earth with a bump, in particular British American Tobacco. Steinhoff remains in a bit of a mess, and investors don’t seem to be giving its management the benefit of the doubt with regards to its accounting irregularities. The share was down 15% in February.






The fund lost 1.2% during February, hit hard by Sibanye-Stillwater (down 18%) and Northam Platinum (down 17%). On the upside were holdings in financial stocks.


The fund proved fairly resilient in February, considering the market turmoil. It was down just 0.4% for the month, boosted by long holdings in Harmony Gold (up 18%), AVI and Growthpoint Properties. In the March report we will explain how and why the Sir Edmund Hillary fund will be absorbed into the Sir John Ross hedge fund, from April 2, under a single investment strategy that will best suit the risk and return objectives of Emperor investors.


The fund was down 1.7% in February. Resources and industrials provided some stability in the form of short positions in Anglogold Ashanti, Northam Platinum, and Hulamin.


The fund lost 1.3% in February, hurt by long positions in Bidvest (-10%), Northam (-17%) and Naspers (-3%).


As all the factors mentioned above attest, February turned out to be a poor month for our bundles. With property shares and foreign equity down heavily, only one of the bundles ended the month on a positive note. This was Elbrus, with a conservative mandate that benefited from its holdings in bonds and cash.


Technical Review

The JSE Top 40 continues to flirt with the 52,000 technical support/resistance level -- basically where it was at the end of January. Conditions remain volatile and at present no obvious sign of a momentum switch is evident. Similarly, on the value front, stocks remain relatively expensive despite the selloff in certain sectors.


Emperor’s sentiment (MSX-Monthly momentum) indicator is still firmly above the 50% mark, we are not overly optimistic as this means only about half of the JSE’s shares went up in February. As for market valuation, Emperor’s Rule of 18 shows a slight improvement in stock valuation from the previous month but shares are still relatively expensive at 21.5.

Looking ahead to the March market report, we do not anticipate hectic market movement in either direction but at this stage in the new political dispensation perhaps a flat JSE is the best we can hope for in the immediate future.

Happy investing.

TC van der Walt

Fund Manager


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