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July 2019 local market commentary: Eskom woes weigh on the JSE

05 August 2019

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by Peter Little, Fund Management

South Africa (SA) got a much anticipated 0.25% interest rate cut in July as the SA Reserve Bank (SARB) cut rates for the first time since March 2018. This was largely overshadowed by Eskom, as Finance Minister Tito Mboweni told parliament that the state-owned enterprise (SOE) would be given a R59bn bailout (in addition to the R69bn bailout granted five months ago). The ratings agencies were unimpressed, with Fitch downgrading SA’s sovereign rating outlook to negative, while Moody’s didn’t change its rating but released a report saying it was concerned that the state power utility would require even more capital from government.

Early in July, US Federal Reserve (Fed) Chair, Jerome Powell, testified before Congress and the market interpreted his comments as suggesting that the US central bank was ready to deliver plenty of monetary stimulus. The rand and local government bonds rallied at the prospect of lower US rates and the SARB’s rate cut provided further fuel for that rally. Unfortunately, the Eskom bailout and the rating agencies’ comments reversed that trend and at month-end the US central bank delivered a message that was much less dovish than Powell’s congressional testimony suggested and the resultant US dollar rally precipitated a further sell-off in the SA currency and bonds. The benchmark R186 SA government bond yield ended the month 0.2% higher (8.3%) and the rand weakened by 1.8% in July.

The FTSE/JSE Capped SWIX Index was down 3.1% for the month, despite a strong performance from index heavyweight Naspers (+2.6%). With local sentiment weighed down by Eskom, banks and insurers were down around 8% in aggregate for the month. Platinum miners continued to rally in July as trading statements showed profits would exceed expectations. Retailers were a mixed bag, with Woolworths rallying after a trading update showed better-than-expected sales growth in its SA stores, particularly from its food division. At the opposite end of the spectrum, Massmart guided to an earnings loss as constrained customers hold off on purchasing discretionary items in its stores, sending the stock down over 15% on the day. Local food producer, Pioneer, was the biggest gainer for the month (+56%) as it received a R24bn buyout offer from global drinks behemoth, PepsiCo. Zeder, Pioneer’s biggest shareholder, also rallied 36%

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