As we commence the 3rd quarter of 2016, we reflect on the first 6 months of the year where global market volatility and political uncertainty remain the norm.

The 2nd quarter of 2016 has seen headlines across the world being dominated by the British referendum and 23rd June vote that saw the Brexit camp win with a 52% majority.

While the world focused on this vote, investors also looked to the US, where Federal Reserve Chair Janet Yellen continued to meander around the possibility of an interest rate hike. This left many market commentators stating that an increase is highly unlikely for the foreseeable future, citing the lack of US inflation and the increase cost burden of their debt.

Closer to home, Finance Minister Pravin Gordhan managed to steer us clear of a June ratings downgrade on our foreign denominated sovereign debt.

The Brexit decision sees Britain (including England, Wales, Scotland and Northern Ireland) leaving the European Union (EU), as first member to leave since its formation.

It is noteworthy to mention that Scotland and Northern Ireland voted to remain in the EU: with a vote of 62% and 55.8% respectively.

Interestingly, this vote saw over 30 million people cast their ballots which is the biggest turnout for a

UK-wide vote since the 1992 general election, and clearly a topic that is important to a tremendous number of people in Britain.

As can be imagined the news of this global and political shock sent markets into a frenzy of speculation and sell-offs in the days that followed the exit vote; also sending the British pound to 35 year lows against the US dollar. That being said we strongly caution clients against any reactionary behaviour, to hold your GBP assets through the cycle and let the fund managers decide on the tactical asset allocation through this period.

Orbis (a global asset manager) summarises their investment view below:

  1. The UK’s vote to leave the European Union surprised markets and caused considerable volatility. We had no edge in predicting the vote’s result, and we have no edge now in predicting its broader implications.
  2. The main question for us is not what will happen to European politics or the UK economy, but whether individual companies look like good long-term investments at the prices the market is offering us.
  3. For the overwhelming majority of our favoured securities, we do not see a clear impairment to long-term intrinsic value as a result of Brexit, though the resulting uncertainty may make for uncomfortable share price movements in the short term.
  4. “What happens next?” has been a common headline over the past week. We don’t know the answer, but we are confident that we can deliver better results on your behalf by remaining focused on the long-term fundamentals of individual companies.

Source: Orbis Funds Report at 30 June 2016.

Moving to the US, Janet Yellen keeps the world on the edge of their seats at each Federal Reserve announcement, yet continues to postpone an interest rate increase in the US. Many market commentators speculate that she cannot raise rates for the foreseeable future as the cost implications on US debt would be drastic. Despite strong wage growth, almost no unemployment and an inflation figure which is positive, albeit not at the 2% target, Ms. Yellen and the monetary policy committee have decided to keep rates unchanged. This contrasts her late 2015 statement which suggested 4 small and gradual rate increases throughout 2016.

The US is nonetheless in good shape relative to the EU where bond yields and inflation are hovering near 0%, and in some cases going negative as we have seen with German, Swedish and Swiss government bonds in the past weeks.

This negative bond yield clearly depicts how investors are prioritizing return of capital over return on capital, which does give cause for concern.

To think investors are happier to lend the government money and get back less than they invested in 10 years’ time instead of investing those funds in the market, is a scary thought.

Back home, the spotlight was on Finance Minister Pravin Gordhan and the “looming” sovereign debt downgrade by international ratings agencies.

While this is nothing to be taken lightly the media did also fail to mention that the downgrade decision was on our foreign denominated debt, which makes up 10% of overall sovereign debt, meaning that a downgrade would have cost our country less than inferred by the media.

Thankfully, this was averted in part by Minister Gordhan’s reputation and appointment after the Nene scandal, a strengthening rand, and perhaps a touch of good luck.

While a December downgrade is still a threat, many believe we’ve managed to navigate ourselves past a downgrade decision altogether.

Focus now rests on the August local elections as the ruling party take considerable strain in many of their municipalities.

The JSE shed almost 3,500 points in the few days post Brexit, but has rebounded to finish the quarter on 52,218 points, virtually flat from 3 months ago.

It is important to remember that in times of extreme volatility and uncertainty, there are always opportunities for investors.  The investment theme that continues to remain the cornerstone of your financial plan is diversification across asset classes and geographies. As always, we urge you to trust in the asset managers we have independently researched and selected, to remain focused on your long-term objectives and committed to your personal financial plan.

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