A little down

Neels van Schaik at PSG Fund Managers says that these losses were however concentrated in only a few sectors, with resources being the main culprit.

Resources have lost 7% during the month, which was primarily driven by the rand appreciation of almost 5% during June.

Since the beginning of the year the market had a disappointing performance, evidenced by the 1.2% decline.

The majority of this decline came in the last quarter as the Federal Reserve Bank made it quite clear that the days of cheap money are numbered, which frightened investors around the globe.

It is not so much the fact that interest rates are on the rise that is taking the market aback, but more the uncertainty around the extent of the tightening cycle. It must, however, be kept in mind that the Fed Fund Rate at 1% is abnormally low.

What is currently unfolding is a normal interest rate cycle moving back in line with GDP growth of close on 7% in nominal terms.

As evidenced by the attached chart, the interest rate cycle is clearly responding to the earnings recovery over the last 18 months and by the looks of it Greenspan has pushed his luck by keeping interest rates on hold for so long while the earnings recovery was in progress.

Although inflation is on the rise it will not become a problem similar to that of the 1970's, even with oil prices at $40 per barrel. The US economy has become much more service orientated and the base from which oil prices are increasing is also much higher than in the 70's.

South African equities have followed offshore markets on their horizontal vector during the last six months and there does not seem to be any conviction to market movements.

The catalyst for a broader market rally will be either a resumption of the commodity boom, which has lost momentum since March or currency weakness. The latter also feels a bit far fetched.

Despite this hawkish view we believe there remains value in certain areas of the market. Local industrials are still trading at huge forward discounts against the market. Large cap industrials (Bidvest, Imperial) are also back at buying territories.

Most of these counters are supported by very appealing dividend yields.

With South African interest rates likely to remain on hold for the next six months while economic growth continues to accelerate, banks also stand to benefit from the improvement in economic activity.

The current rating of the banking sector is not justified given the stability and sustainability of earnings growth over the last few years.