The FTSE JSE All Share Index (J203) nearly wiped out April’s 5.0% gain in May, ending the month 3.6% in the red (down 5.6% YTD). This came as global market jitters re-emerged on the back of a crisis in Italy (the eurozone’s third-largest economy), which sent its government bonds plummeting and hit the euro and other risk assets. Trade concerns also continued to weigh on sentiment after US President Donald Trump slapped tariffs on steel and aluminium imports from the EU, Canada and Mexico. Financial counters felt the most pressure with the FINI-15 dropping 6.9% MoM (-7.1% YTD), while Industrials closed 5.1% lower MoM (-8.9% YTD).
A turnaround in some commodity prices saw the Resi-10 ending May 4.5% in the green (the index is now up an impressive 9.1% YTD). While market-heavyweight commodity companies, including BHP Billiton (12.7% of the J203) and Glencore (7.02% of the index), posted robust monthly gains of 8.6% and 2.8%, industrial counters including British American Tobacco (with a 11.6% J203 weighting), Richemont (5.2% weight) and Naspers (10.3% weight) declined by 5.6%, 1.9% and 1.1% MoM, respectively.
Although the rand recorded a MoM decline of 1.9% (-2.6% YTD) as a strong dollar rode roughshod over the local unit, it did manage to improve slightly on 30 May after the greenback came under pressure following its strong run (the dollar reached a near 10-month high against the euro on 29 May).
Locally, in terms of economic data, April consumer price inflation (CPI) accelerated to 4.5% YoY from a multi-year low of 3.8% in March. MoM, CPI advanced by 0.8%. Most of the increase was due to higher alcohol, tobacco and fuel prices, while the 1% VAT increase also came into effect in April, further contributing to the upward momentum. Private sector credit extension growth dropped sharply to 5.1% in April vs consensus forecasts of 6.1%. Meanwhile, the SA Reserve Bank (SARB) Monetary Policy Committee (MPC) decided to keep interest rates at current levels at its May meeting.
On the political front, SA President Cyril Ramaphosa reached his first 100 days in office this past month, with many political commentators of the view that he has done well thus far at turning the tide following Jacob Zuma’s disastrous tenure. Nevertheless, while so-called Ramaphoria may have lifted business confidence, commentators agree that a lot more still needs to be done to put the SA economy back on a growth trajectory.
We sold out of our Glencore shares in the portfolio this past month following corporate governance concerns and despite the fact that we believe the underlying fundamentals continue to look attractive. Similar to its mining peers, Glencore is on a path of meaningful deleveraging, rising cash returns to shareholders and strong free cash flows, which are accentuated by capex that remains at low levels (and which the firm has guided will grow just over 10% cumulative for the next three years). The Group’s unique mix of commodities, relative to its peers, was also an appealing quality. Furthermore, underlying operations are enjoying strong momentum from attractive commodity prices and good recent cost performance.
However, despite the above, the company operates in challenging jurisdictions that arguably warrant a higher political risk premium than some of its peers. So, given the generally high degree of correlation between mining shares, we believe it prudent to gain exposure to the sector through other companies at this point in time.
~ written by:
Seleho Tsatsi, Investment Analyst
In May, HNA Group, a large shareholder in Comair was the seller of a stake amounting to 5% of the company’s total shares in issue due to an internal reorganization at HNA. This presented an opportunity for investors to acquire Comair shares at a discount to the market (ZAc550 vs the 30-day volume weighted average price [VWAP] of ZAc624), and we elected to participate in the offering on behalf of our clients.
Despite the short-term pressure an elevated oil price will place on operating margins, we believe the share offers compelling value at ZAc550 with operations effectively being valued on a forward P/E of just 5.5x, assuming an average oil price of US$79/bbl for FY19. Around R1.67/share in cash, and a further expected R1.80/share in cash from the SAA damages claim, also present significant optionality in the business. We believe this will likely result in a material return of capital to shareholders and potentially accretive M&A activity.
~ written by:
Henry Biddlecombe, Investment Analyst