April 2017 Newsletter 1

April 2017


“Why, sometimes I’ve believed as many as six impossible things before breakfast.”   Lewis Carroll; Alice in Wonderland.

Some days I feel just like Alice when looking at South Africa and our markets. For a holiday filled month of just 17 working days it was an April to remember. 

On April 3rd – the S&P rating agency, in an unscheduled review, downgraded South Africa’s credit rating to “junk” status.  Fitch & Moody’s followed later in the week. 

The Volatility index (or the VIX) reached a 10 year low last night – traders need volatility to trade the market; currently the market gaps up or down at the start of trade and then trade sideways during the day. One would think in periods of great uncertainty we would see an increase in volatility but this does not seem to be the case. At Refinery we don’t expect this low-volatility regime to continue indefinitely (or maybe not even much longer). At some point in the near term, companies will either meet (or even beat) relatively lofty Q2 EPS expectations, or they won’t, and the latter would be a nasty surprise for investors conditioned to positive surprises.

As active investors gather more information about the outlook for individual stocks, they will choose whether to increase or decrease their single name and sector exposures. In other words, stock volatility has collapsed, but we have reason to believe it will rise again – and perhaps by a lot.

The geopolitical outlook is “transitional” to say the least – the outlook for the next couple of weeks: – 


In France the first round of the 2017 presidential election was held on 23 April 2017. As no candidate won a majority, a run-off election between the top two candidates, Emmanuel Macron and Marine Le Pen will be held on 7 May 2017.

The markets seem to favour Macron – rallying after his lead in the primary election.  Mr Macron’s manifesto was not released until early March – and unsurprisingly contains pro-business measures in the hope of boosting the economy, such as cutting corporate tax by 33% to 25%.  It also contains a payroll tax cut for low-paid workers and a promise they would be exempt from some social welfare levies – a measure said to amount to an extra month’s wage.  €50bn in public investment is on the cards over five years.   Mobile phones would be banned in schools for pupils aged up to about 15, but 18-year-olds would get a €500 “culture pass” to spend at cinemas, the theatre and concerts.

Le Pen on the other hand – seems to favour a “Frexit” and has voiced support to a French referendum similar to the British one, where the people vote whether to stay in the EU or not. Her manifesto is one of “France first”.   Le Pen wants France to leave the EU’s Schengen zone, reintroduce national borders and boost customs controls. The most important pledge comes at the top of the list, as part of a bid to restore monetary, legislative, territorial and economic sovereignty: after a period of negotiation, to put France’s membership of the EU to a referendum.

She will lower the retirement age to 60, reduce energy prices and taxes, and introduce trade barriers along with measures designed to help small rather than big business. The 35-hour week is sacrosanct and civil servants will be protected. Continue reading April 2017 Newsletter 1