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May local market commentary: Materials counters a rare bright spot on the JSE

04 June 2020

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by Peter Little, Fund Management

South Africans (SA) remained locked down at level 4 for the duration of May, although with a mid-month easing of some level-4 restrictions, the most significant of which was the lifting of all restrictions on ecommerce (with the exception of alcohol and cigarette sales). As the country moves to level 3 at the start of June, most economic activity will be re-allowed, but with strict health protocols in place and schools will gradually start to re-open, although the leisure and hospitality sectors remain closed and inter-provincial travel remains heavily restricted.

The SA Reserve Bank (SARB) cut the benchmark repo rate another 0.5% to 3.75% in May, for a cumulative 2.5% of cuts since the start of the crisis. The SA government’s 10-year bonds saw their yields drop from 10.5% to 9.4% during May as the FTSE/JSE SA All Bond Index rallied 7.1% MoM, leaving it up 21.8% since its 23 March low. The SA rand also finally benefitted from the recent rally in global risk assets as it strengthened by 5.6% against the US dollar, making it one of the best-performing EM currencies for the month, though it remains 20% weaker against the US dollar YTD, with only the Brazilian real faring worse YTD (-24.7%).

Compared with the good performances of SA bonds and the rand, SA’s equity and listed property markets fared less well in May, as the FTSE/JSE Capped SWIX and FTSE/JSE SA Listed Property indices fell 0.4% and 0.8% MoM, respectively. Materials shares were a rare bright spot in the local equity benchmark as platinum miners rallied 10% and diversified miners 12% MoM thanks to a double-digit rally in the price of the PGM basket and a 20% MoM rally in the iron ore price. Locally listed Chinese tech heavyweights, Naspers and Prosus had diverging fortunes in May, the former down 3.8% and the latter up 3.5%. Investec led local banks lower, down 20% in May as it delivered results bogged down by provisions and restructuring costs and its exit from the MSCI Index during the month exacerbated the poor performance.

The equity markets saw some creative corporate activity for the month, with Mr Price announcing its intention to raise approximately 10% of its market cap to accelerate internal expansions and provide management with the flexibility to act quickly should the COVID-19 crisis present attractive opportunities. PSG announced that it would unbundle the majority of its Capitec shares (Capitec accounts for about two-thirds of its pre-unbundling assets) and Resilient said that it had acquired an equity stake in Lighthouse, which it paid for with Nepi Rockcastle shares.

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