Global markets continued to react to short term newsflow in November. This daily “noise” has been louder than ever in 2018, but a few of the major 2018 themes i.e. Brexit, Trade Wars, Interest Rates, appear to be coming to a head.
US Mid Term Elections Stoke Emerging Market Rally
The US Mid Term elections resulted in Democrats gaining control of the House, while Republicans held on to their majority in the Senate. Consensus is that Trump will now struggle to implement policies requiring a congressional majority. The US equity market responded positively to this news as did emerging market equities, which were up 4% for the month. It seems that as much as markets have enjoyed Trump’s tax cuts, perhaps they are also concerned about the damage he may have done with unfettered power.
Global Growth is Slowing
US growth remained strong in November. There is a growing belief that the strong growth in US company earnings reported in the third quarter of 2018, may have peaked. Globally there is evidence that growth is slowing. In line with this, The Organization for Economic Co-Operation and Development lowered its 2019 global growth outlook to 3.5% from a previously forecast 3.7%.
A further signal of slowing global growth has been the dramatic fall in Oil prices in November. Oil reached a four-year high in early October and then fell more than 22% in November closing at $58.71 a barrel. A combination of high US shale supply and concerns about slowing global growth are explanations provided for the price drop.
US Interest Rate Hike Expected to Slow
In line with the “slowing growth” theme, the rate at which the US Fed has consistently raised US interest rates in the last two years is expected to slow in 2019. US Fed chairman Jerome Powell, commented last month that US rates are now approaching a range the central bank judges to be neutral for the economy. In other words, the US Fed is expected to be more cautious around lifting rates in 2019. Following these comments, interest rate markets are now only pricing in two rate hikes in 2019.
Trade War Ceasefire – Is It Sustainable?
Last month we mentioned that the biggest risk to global equity markets is the impact of a prolonged trade war. At the annual G20 summit held in Argentina, Donald Trump and China’s Xi Chinping reached an agreement that provides some hope for markets. The team at 36One Asset Management were fast to publish a note expressing their views on the matter, which we share with you as it provides a good summation and shows how trade wars have weighed on some asset managers minds:
“This past weekend’s G20 Summit in Buenos Aires (Argentina) was the most important event for global financial markets this year. After a battered global equity market performance in 2018, international economic cooperation, and particularly US-China relations, were crucial to future equity market performance. At the G20 Summit on Saturday, US President Donald Trump agreed to suspend the additional 25% tariff hikes on $200bn of Chinese goods (previously scheduled for 1 January 2019). In return, Chinese President Xi Jinping agreed to buy an unspecified but “very substantial” amount of agricultural, energy, industrial and other products from the US. The world’s two largest economies now have 90 days to negotiate a lasting agreement. Among the key US demands is a halt in what they claim to be widespread intellectual property theft and forced transfer of technology by China. The outcome from the summit is very positive for global markets, especially emerging markets, given the far-reaching trade consequences which China has with the rest of the world. Co-operative follow-through by both countries is essential now in order for this to have a long-term successful outcome.”
Fingers crossed this issue will be resolved, and this major concern will no longer be hanging over the heads of equity markets in 2019.
A Dog’s Brexit
The UK is rapidly reaching a critical point in the Brexit saga. The UK and the EU have now agreed a draft withdrawal treaty. The agreement has been endorsed by Theresa May’s cabinet, but to be implemented it needs to be ratified by the British parliament on 11 December 2018 – and therein lies the challenge. Shortly after the treaty was agreed by the cabinet, Dominic Raab, who negotiated the Brexit agreement, resigned as Brexit secretary, together with three other cabinet ministers. This shows the extent of the divide over the agreement as many members of parliament view the deal as weak for the UK. The British Pound continued to weaken against the USD during November, and the FTSE 100 Index, was down 1.6%. The question asset managers are divided on, is how markets will react should the Parliament not approve the deal, and the UK economy moves into deeper uncertainty.
The JSE All Share Index was dragged down further in November, this time by resource shares. The Resource Index returned -11.5%, whilst Financial and Industrial Indices were largely unchanged.
What Happened to Resource Shares?
With heightened concerns for a slow-down in global growth, it is not surprising that resource shares which are cyclical in nature, sold-off in November. Fuelling the sell-off was the Rand’s 6% improvement as well as the rapid decline in the oil price, which saw Sasol’s share price fall by just over 13%.
Surprise! SARB Hikes Repo Rate
Given the state of the South African economy, it caught most by surprise that the SA Reserve Bank’s Monetary Policy Committee (MPC) decided to increase the repo rate by 0.25% to 6.75%. It was a close decision for the SARB, as three members voted for a hike and three voted for no change and so SARB Governor Lesetja Kganyago cast the deciding vote.
Reading the Reserve Bank Governors statement, it seems that the hike was a pre-emptive strike to keep inflation in check next year, although given the stronger Rand and declining oil price this seems somewhat premature. The interest rate hike, together with a general improvement in emerging market currencies supported Rand strength in November, with the Rand ending the month at R13.86 to the USD.
SA Sovereign Credit Rating Maintained
S&P Global ratings agency reaffirmed their rating of SA’s foreign and local currency debt at BB and BB+, both non-investment grade, with a stable outlook. They made positive comments about Ramaphosa’s plans to boost growth in the SA economy, however, they also reiterated their concerns that SA’s sluggish growth, its rising debt burden and the risks the State-Owned Enterprises place on the SA government through contingent liabilities are negative and should be addressed.
And Finally… Trust Your Fund Managers Through the Economic Cycle
There has been much talk about the global economic cycle slowing down. What does this mean for investors in funds? Should I sell and wait for an upswing?
Fund managers, adapt their portfolios to take into account changes in the economic cycle, and many work hard to develop an informed view about where a country, or indeed the world, is in the cycle. How they adapt depends on each manager’s particular investment style. For instance, some may decide to increase their exposure to companies with proven stable income streams that are not too affected by economic slow-downs e.g. tobacco companies. On the other hand, as these managers anticipate the cycle beginning to pick up again, they will gradually switch into companies with income streams geared to economic growth – think mining companies. Again, depending on their style, certain asset managers will be more aggressive than others in trying to time these swings. But not all fund managers react to macro-economic factors. Some will use the down turn to buy those companies that have fallen in value as the economic cycle slows. At a certain point, they will view such out of favour companies as below fair value and begin to invest in them.
Whichever style your selected fund managers adopt (and ideally, they will have different approaches), it is prudent to leave this judgement in their hands, as the right managers have the expertise to navigate the investment landscape through all economic cycles.
This is our final market update for 2018. We would like to take this opportunity to wish you
and your family a wonderful time over the festive season. Our next update will be on 1 February 2019, and we sincerely hope that next year brings the returns we eagerly anticipate!
Compiled by Mike Moore, Wealth Manager