FINALLY, AND MOST AMBITIOUSLY, AS A SOCIETY WE SHOULD EXPLORE WAYS TO RAISE PRODUCTIVITY GROWTH. STRONGER PRODUCTIVITY GROWTH WOULD TEND TO RAISE THE AVERAGE LEVEL OF INTEREST RATES AND THEREFORE WOULD PROVIDE THE FEDERAL RESERVE WITH GREATER SCOPE TO EASE MONETARY POLICY IN THE EVENT OF A RECESSION. Janet Yellen

MARKET OVERVIEWSpeculation about the timing of the US interest rate increases fuelled much of August’s volatility as markets traded on thin volumes over the European and US summer holidays. The search for yield in a world of negative interest rates translated into strong inflows into emerging markets such as South Africa, strengthening currencies and pushing down bond yields. Month end, however, saw the flows reverse and the rand weaken against the US dollar as US Federal Reserve officials ratcheted up their rhetoric on interest rate increases in 2016. The situation worsened considerably on mounting speculation that President Jacob Zuma will renew his push to remove the Minister of Finance, Pravin Gordhan, from his post.

The global economic data releases remained subdued.

While Brexit has been grabbing headlines, economic developments in China have gone relatively unnoticed. Two Chinese gauges of factory activity showed conflicting results in July, with the official manufacturing PMI dipping into negative territory for the first time in five months to 49.9, while the competing Caixin manufacturing PMI posted a strong rise to 50.6 in July from 48.6 in June. The official PMI tracks conditions at larger state-owned companies, while Markit’s Caixin PMI tends to focus on smaller private companies. Both exports and imports fell in July on weak demand, but industrial production and retail sales growth improved. China’s services sector is also holding up relatively well. Despite last year’s promises, we expect that China will continue to ramp up infrastructure spend and maintain a loose monetary policy to meet its annual growth target of 6.5% to 7%.

This means that longer-term structural problems, including overcapacity and excess reliance on government spending, will not be addressed in a meaningful way. This is, however, good news for commodity prices.

The expectations of an interest rate increase in the US by year end rose considerably after the US Federal Reserve’s chair, Janet Yellen, indicated at the global central banks’ annual meeting at Jackson Hole, Wyoming that the case for a rate rise has “strengthened”. The economic data releases were largely supportive, with July jobs creation data coming in at a better than expected 255 000, and the unemployment rate remaining unchanged at a “full employment” 4.9%. Consumer inflation, excluding food and energy, rose to 2.2% year-on-year in July, just above the US Fed’s 2% target, and a revised GDP growth number for the second quarter did not disappoint at an annualised rate of 1.1%.

The euro-area economy continued to expand at a steady pace in July and August. At 53.3, up from 53.2 in July, the flash estimate of the Markit Eurozone Composite PMI inched up to a seven-month high, indicating that growth in the third quarter is likely to be similar to that seen in the first half of the year. The flash manufacturing PMI fell marginally from 52.0 in July to 51.8. Inflationary pressures remained muted with inflation for the eurozone coming in at 0.2% in July.

SYGNALSAUGUST 2016

European banks continued to suffer the backlash of Brexit and low interest rates. Bank share prices fell further in August after a raft of disappointing corporate news and on speculation that Italian banks may need to write down the value of their loans on the same scale required by a rescue of Monte dei Paschi, Italy’s most troubled bank, which announced plans to sell non-performing loans.

The Bank of England cut its benchmark interest rate to a new low of 0.25% and announced that it would buy £70 billion of government and corporate debt, as well as providing ultra-cheap four-year loans for banks, to stimulate the UK economy. The BoE said the outlook for growth had “weakened materially” following Brexit, cutting its forecast for growth next year to just 0.8%, from 2.3% previously. The central bank also expects that the sharp fall in the pound since the Brexit vote and the stimulus will drive annual inflation back to its 2% target by next year.

Japan’s economy stalled in the second quarter with an annualised growth of just 0.2% amid falling exports and weak corporate investment. Corporate profits have fallen sharply on the back of the strong yen. Although not ruling out further direct intervention by the central bank, the government stepped in with a new US$45 billion stimulus programme, including welfare and infrastructure spending boosts and an allocation to small and medium-sized businesses hit by uncertainty caused by Brexit.

Emerging markets were net beneficiaries of the search for yield emanating from developed markets as bond yields fell to record lows globally. The same flows started to reverse by month end as markets started to price in the possibility of a US Fed interest rate hike as soon as September.

Increasing tensions between Russia and the Ukraine and a devastating earthquake in Italy weighed on sentiment.

Central bankers met once again at Jackson Hole, Wyoming. The theme of this year’s gathering focused on the policymakers’ ability to fight future recessions.

Most papers presented at the conference supported the notion that central banks should continue to deploy non-traditional tools in future, such as quantitative easing and negative interest rates, and that the definition of “normal” monetary policy has changed. The possibility of central banks holding vast quantities of debt on their balance sheets for a long period of time was also debated, a topic particularly timeous coming at a time when the US Fed is trying to decide how far it should allow its US$4.5 trillion balance sheet to shrink.

Negative interest rates were particularly controversial given their recent adoption by the central banks in Japan, the Eurozone, Denmark, Sweden and Switzerland. To date these policies have had mixed effects, as well as some unintended consequences. In Japan, negative rates were accompanied by a strengthening currency, the opposite of the central bank’s expectation. In Switzerland, banks responded to negative rates by making mortgage borrowing more expensive, and not less as hoped. Consumers in Germany, Japan, Sweden, Switzerland and Denmark responded contrary to expectation by saving more than ever before. Ultra-low rates have also provoked concerns about the longer term profitability of the banking sector, made funding positions of defined benefits pension funds worse and triggered worries among savers and pensioners dependent on yield for income.

And yet, central bankers claim that negative rates are working. Yields on 30-year Japanese government bonds dropped from about 1.5% before Japan adopted negative rates in January to less than 0.5%, and in the Eurozone loans to households and non-financial corporates were up 1.8% from a year earlier, a reversal in a contraction in lending in the months before negative rates were introduced.

The oil price hovered around the US$50 a barrel level as big oil producers increased their output and the US commercial stockpiles of crude oil and refined products increased to a record 1.4 billion barrels. Prices were supported by non-specific rumours that OPEC members may renew talks on output cuts and by production cuts in Nigeria and Venezuela.

The rest of the year is likely to focus on the US Fed’s action in respect to interest rates, with emerging markets bearing the brunt of the volatility. We believe that a September interest rate hike is most likely. This makes for a bearish view on the rand. Given the domestic political risks, the likelihood of a credit rating downgrade and a consequent sell-off in the rand and a rise in bond yields is almost a certainty. In terms of Sygnia’s positioning we continue to maintain a significant “rand hedge” position and a focus on broad diversification across asset classes.

AUSTRALIA

Australia’s central bank cut the interest rate by 0.25% to 1.5%, responding to record-low inflation of 1.5% and a slowing jobs market

CHINA

China’s overall debt level has soared to 240% of GDP on the back of a surge in lending to non-financial state-owned enterprises that absorb about half of all bank lending but account for only about 20% of industrial output. According to the IMF almost half of the

shadow banking or wealth management products, which grew by 50% to US$6 trillion last year and have fuelled China’s credit boom, carry an elevated risk of default. These “products” allow banks to channel loans to local governments, property developers and industries struggling to access normal bank loans and disguise these as off-balance sheet investments that carry smaller reserve requirements.

SPAIN AND PORTUGAL

The EU has allowed Spain and Portugal additional time to hit their budget deficit targets of 3% of GDP, targets both have repeatedly missed since 2009. Apart from this, both countries are seen as relative economic success stories. Madrid, in particular, has argued that it would be paradoxical to punish a country that has pushed through deep economic reforms and that saw its economy expand by 3.2% last year, almost twice as fast as the Eurozone’s average.

GERMANY

The German economy grew by a better-than-expected 1.8% year-on-year in the second quarter of 2016, supported by a rise in exports and household consumption.

ITALY

Italy is the next European nation to go to the polls in a looming referendum on political reform in November. The referendum will decide the fate of Prime Minister Matteo Renzi.

POLAND

Despite reverting to right-wing politics, Poland’s GDP growth advanced an unadjusted 3.1% year-on-year in the second quarter of 2016, with average gross wages increasing by 4.8% in July from the previous year.

UK

The practicalities of Brexit are only now striking home as London and Brussels confront the complexity of divorce talks and the minefield of European elections in 2017. The negotiations will be protracted and may well span into 2018, leaving businesses in the UK with little certainty.

THAILAND

A constitutional referendum entrenched the rule of the military junta in Thailand. The military overthrew the elected government two years ago in what was Thailand’s 12th successful coup since the end

of absolute monarchy in 1932. The junta says that it aims to eradicate corruption and bring stability. Thailand lags behind its peers in Southeast Asia in growth, with GDP expanding by 3.5% year-on-year in the second quarter, compared with the Philippines’s 7.0% and Vietnam’s 5.5%.

GREECE

Greece’s economy expanded in the three months ending in June, after contracting in the previous quarter. GDP rose a seasonally adjusted 0.3% from the first quarter, when it fell by 0.1%. On an annual basis, GDP declined at a slower pace of 0.7% year-on-year in the second quarter, following a 0.8% fall in the preceding quarter.

360 DEGREES AROUND THE WORLD

After firming to R13.30 to the US dollar on the back of the emerging markets rally, the rand fell to below US$14.50 on the news that Minister of Finance Pravin Gordhan faces possible espionage charges and imminent arrest. Gordhan is seen as single-handedly blocking the renewal of financial guarantees for SAA and the approval of the nuclear procurement programme, while spearheading the investigation of Prasa and Eskom tenders. Widely condemned as a smokescreen for President Jacob Zuma’s blatant and desperate attempt to loot the economy prior to the expiry of his term of office as the president of the ANC, the move is likely to result in a credit ratings downgrade for South Africa and a further sell-off of the currency. The fall was exacerbated by the US Fed’s indications of an interest rate hike by year end that punished all emerging markets.

The yield on the benchmark R186 bond hit 9.00% from 8.44% a day earlier, a level last seen in the fourth quarter of 2015. Banks came under pressure on the weaker rand and foreign selling, while all rand hedge counters soared.

President Jacob Zuma has been emboldened by the fact that he was not held personally accountable for the ANC’s poorest showing in local elections since 1994. Support fell from 61.9% in the last elections to 53.9% in 2016. In addition, the ANC lost control of all major urban municipalities, including Nelson Mandela Bay, Johannesburg and Tshwane.

In another act of blatant disregard for the credit rating agencies, which explicitly warned against political interference in state-owned enterprises, Zuma also appointed himself as chair of a newly-formed Presidential State-Owned Enterprise Coordinating Council.

On the economic front, the seasonally adjusted Barclays Manufacturing PMI fell by 1.2 points to 52.5 in July. Despite the slight drop, the current level still signals that the sector experienced a reasonably strong start to the third quarter after a robust performance during the second quarter. The Barclays PMI remains in line with recent Eurozone Manufacturing PMI readings, a key export market for locally produced goods.

However, South Africa’s trade conditions worsened in July as new orders and sales volumes fell amid weak demand and low economic growth. Retail sales grew by a mere 1.7% in June from a year earlier, slowing much more than expected from growth of 4.5% in May.

Consumer inflation slowed in July, rising by 6% year-on-year from 6.3% in June. The Reserve Bank expects inflation to remain outside the target band until the third quarter of 2017. It sees inflation averaging 6.6% in 2016 and 6% in 2017. Prices of food and beverages rose 11.3% year-on-year in July, accelerating from 10.8% in June.

Electricity tariffs came into question once again after a court set aside a decision by the National Energy Regulator to grant Eskom an effective 9.4% increase for 2016, on the grounds that the regulator’s rules and methodology had not been properly applied. The effect of the ruling is that unless Eskom or Nersa appeals the decision, Eskom will not be permitted to continue to charge customers the tariff increase, and will have to revert to a 3.4% increase on 2015 tariffs.

On the corporate front BHP Billiton reported an annual loss of US$6.4 billion, the largest in its history, after more than US$7 billion of impairment charges – the most serious relating to a BHP joint venture with Vale in Brazil where an iron ore mine dam collapse last year released a torrent of toxic mud, killing 19 people and leaving 700 homeless. Earnings fell by 44% and profits by 81% year-on-year.

SOUTH AFRICA

ODDS AND ENDSUBER GIVES UP ON CHINA

Uber has agreed to sell its Chinese operations to its biggest rival, Didi Chuxing, ending its costly battle for the Chinese car-hailing app market. Didi will acquire all of Uber China’s operations, while investors in Uber China will receive a 20% stake in Didi. Didi will also invest US$1 billion in Uber’s global business. While China surpassed the US as Uber’s biggest market in terms of daily rides, this came at a cost of US$1 billion a year as Uber’s strategy in China has relied on heavily subsidising its rides. Uber controlled 20% of the market against Didi’s 80%.

TRUSTEES TAKE NOTE A slew of class action suits have been filed by employees against lead-ing US universities, including Yale, New York University, MIT, Duke, Johns Hopkins, the University of Pennsylvania and Vanderbilt. All of the suits allege that the retirement plans sponsored by the univer-sities offered far too many investment options, many of which were too expensive, when cheaper alternatives were available. The suits also argue that the long lists of investments served only to confuse investors.

ONE IN A MILLION

Wal-Mart made a US$3.3 billion offer to buy one-year-old online dis-count retailer Jet.com to give its e-commerce efforts a much-needed jolt. This is Wal-Mart’s biggest acquisition since buying South African Massmart for US$2.3 billion in 2010. Amazon overtook Wal-Mart by market capitalisation a year ago and now is valued 50% higher than its brick-and-mortar store rival.

Jet.com raised US$500 million in VC funding by marketing itself as a challenger to Amazon and Wal-Mart. It offered lower prices based on an algorithm that takes into account basket size and the proximity of the merchandise to the buyer. However, as it did not own many of the goods it was selling it relied on taking orders and placing those on behalf of its customers on other sites, often selling the items below what it paid while absorbing the shipping costs. Jet.com faced years of negative cash flows as it tried to build market share. Wal-Mart on the other hand has struggled to build a credible online presence to compete with Amazon.

GOLDMAN SACHS GOES RETAIL…

Goldman Sachs has always positioned itself as a provider of services to wealthy institutions, multinationals and rich families. However, after acquiring a US$16.5 billion book of deposits from GE Capital it has decided to go retail, launching the GS Bank and offering online savings accounts that can be opened with a deposit of just US$1 and with interest rates about 100 times better than those at big US retail banks like Wells Fargo or Bank of America. Goldman Sachs is going retail for the simple reason that life on Wall Street has become much tougher since the global financial crisis. Once-powerful business lines such as fixed-income sales and trading have been struggling with tighter regulation and a shift to electronic platforms, while revenues in the bank’s asset management division have been squeezed by a broad shift to passive rather than active investing.

…WHILE FORD GOES DRIVERLESS

Ford Motor announced plans to release a fully driverless car without a steering wheel or pedals in the next five years. It would initially tar-get ride-sharing fleets and package-delivery services before offering vehicles to consumers. The vehicles will be confined to cities with pre-mapped zones designed for autonomous vehicles.

Ford is merely responding to competitors. Earlier in the year General Motors took a US$500 million stake in the ride-hailing startup Lyft, which it plans to use to test a fleet of driverless Chevrolet Bolt taxis. Tesla, which released its driver-assist Autopilot system last year, says it will be the first to put a fully driverless car on the road, although it has not set a date. Google’s parent company, Alphabet, announced that it was pairing with Fiat Chrysler to jointly test self-driving tech-nology in minivans. And other global giants, including Toyota, Nissan and Volkswagen, have all committed to putting self-driving cars on the road within the next five years.

INDEX-TRACKING “FLOWMAGEDDON”

Index-tracking funds now account for 40% of the US$9 trillion in US equity mutual funds and exchange-traded funds. In what Morningstar dubs “Flowmageddon”, over the last 12 months investors have pulled US$308 billion out of actively managed mutual funds and poured US$375 billion into passive mutual funds and ETFs. This came against a backdrop of data that showed that 83% of actively managed US mutual funds and 86% of European mutual funds have underperformed the market over the last decade.

BANKS SUPPORT DIGITAL CURRENCIES

Four of the world’s biggest banks have teamed up to develop a new form of digital cash that they believe will become an industry standard to clear and settle financial trades over blockchain, the technology underpinning bitcoin. UBS, Deutsche Bank, Santander and BNY Mellon have joined forces to pitch the idea to central banks, aiming for its first commercial launch by early 2018. The move is one of the most concrete examples of banks co-operating on a specific blockchain technology to harness the power of decentralised computer networks and improve the efficiency of financial market plumbing.

FIND OUT MORE ABOUT OUR FUNDS: WWW.SYGNIA.CO.ZA/

DISCLAIMER: All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an adviser or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Any representation or opinion is provided for information purposes only.

The figures and values are calculated by FTSE International Limited (‘FTSE’) in conjunction with the JSE Limited (‘JSE’) in accordance with standard criteria. Figures and values quoted are the proprietary information of FTSE and the JSE. All copyright subsisting in the Figures and values vests in FTSE and the JSE jointly. The data was obtained from I-Net Bridge.

KEY INDICATORS1 MONTH 3 MONTHS 6 MONTHS 1 YEAR 2 YEARS 3 YEARS 5 YEARS

J203T FTSE/JSE All Share Index 0.3% -1.6% 8.4% 8.6% 4.8% 11.0% 14.7%

J200T FTSE/JSE Top 40 Index 1.2% -3.1% 7.3% 7.4% 3.7% 10.2% 14.2%

J210T FTSE/JSE Resources 10 Index -0.2% -0.4% 15.0% -9.9% -22.8% -11.1% -6.1%

J211T FTSE/JSE Industrials 25 Index 2.0% -2.9% 6.3% 13.6% 12.1% 16.7% 24.0%

J212T FTSE/JSE Financials 15 Index -2.9% -2.9% 5.4% -6.5% 4.1% 13.4% 17.4%

J403T FTSE/JSE SWIX Index -0.7% -0.1% 11.1% 8.9% 6.7% 13.3% 16.2%

J303T FTSE/JSE CAPI Index -0.3% -1.6% 8.4% 9.0% 5.1% 11.2% 14.8%

J253T FTSE/JSE SA Listed Property Index -4.9% -0.6% 7.1% 3.5% 14.9% 16.6% 17.1%

ALBI JSE All Bond Composite Index -1.8% 4.5% 7.6% 4.5% 4.9% 7.1% 6.9%

STeFI STeFI Index 0.6% 1.8% 3.6% 7.0% 6.7% 6.3% 6.0%

MSCI World Index In SA Rands 6.2% -3.5% 4.4% 18.1% 18.7% 21.0% 27.0%

Rand/US Dollar Exchange Rate 6.1% -6.4% -7.2% 10.7% 17.4% 12.7% 16.0%

Rand/Euro Exchange Rate 5.8% -6.2% -4.9% 10.2% 8.2% 6.5% 10.3%

Headline CPI 0.8% 1.6% 4.6% 6.0% 5.5% 5.8% 5.7%

PPI 0.8% 1.7% 4.1% 7.4% 5.3% 6.2% 5.1%