Global Market

Developed market shares led equity markets up in October, rising 1.9%, whilst the returns of emerging markets were muted, ending the month up 0.15%. Politics continued to impact sentiment as Donald Trump and Theresa May battle, ham fisted, through their respective terms.

Whilst writing this, positive news broke for global shares on the 3rd of December, as Donald Trump is on his way to winning his first big policy victory. The US Senate voted to approve Trump’s tax reform policy which aims to reduce US company tax from the current rate of 35% to 20%. This is a huge reduction, and and will provide a boost to the after-tax profits of US companies. Investors had been anticipating this news, however Trump’s inability to garner support to pass any of his key policy promises thus far, left investors wary of his getting the tax reform plans through. If Trump has his way, this policy will be passed into law “before Christmas”. Higher earnings for US companies, should mean higher valuations, and so this news will underpin client portfolios with exposure to US shares.

Lurking behind this positive news however, is former Trump national security advisor, Michael Flynn’s admission that he lied to FBI investigators about his contacts with the Russian ambassador before Trump was elected president. Trump is now closer to becoming implicated in discussions with the Russians leading up to his election, which brings uncertainty and volatility to the outlook. During November the USD weakened against the major currencies, some of which is attributable to the Flynn admission.

The shares of European companies have performed extremely well over the past 12 months, leading the returns of developed markets and effectively taking over from the US market. The French CAC 40 is up 18% and the German DAX is up 32.1%. This follows expectations that the European economy will continue to recover steadily. It is now on track to achieve its best quarter of growth in nearly 7 years.

The uptick in US and European interest rates remains an important factor on investors radars. Expectations are that the US Fed will increase rates again in December and then make three increases in 2018. Inflation in the US economy remains unexpectedly low, although the US Tax reform may stoke this somewhat. European interest rates, currently at zero, may begin to rise should the Eurozone continue to improve.

Signs that Brexit is impacting the UK economy continued this month as higher inflation due to a weaker currency is slowing growth, consumer sentiment is dropping, and house price growth looks vulnerable. Theresa May’s negotiations have thus far provided little certainty for investors and therefore the process is viewed with heightened downside risk.

The Oil price maintained its recent gains, ending the month at $63.57.

South African Market

Although S&P downgraded South Africa’s foreign and local currency rating by one notch to BB and BB+, respectively, it was financial shares which led the JSE higher in November, taking the return of the JSE All Share Index to a healthy 22.1%, for the year to date.

S&P now rates South Africa as below investment grade. Moody’s did not lower SA’s rating, but put it on a review for a downgrade. For now, Moody’s rates the foreign and local currency debt of South Africa one notch above non-investment grade. Moody’s will, in the next 60 to 90 days, decide whether to downgrade South Africa to non-investment grade or keep the rating unchanged.

Jonny Myerson of Granate Asset Management advises us that the immediate effect of the downgrade by S&P is that an estimated $3bn of SA bond exposure will be sold by global bond funds that are only permitted to invest in bonds in The Barclays Global Bond indices. Should Moody’s downgrade SA debt to junk status, then SA will be excluded from The Citibank World Government Bond Index as well, and it is estimated that this will result in sales of $9bn of exposure to SA bonds. Prescient Investment Management’s analysis shows that that SA bonds are priced fairly, relative to our emerging market peers (Brazil, Russia, India and Turkey) – in other words the market expects SA to be downgraded to junk status by Moody’s too. For this reason, given current circumstances Prescient Investment Management believe that any weakness in bonds, as a result of a Moody’s downgrade will be short lived. However, they do warn that a general loss in appetite for emerging market bonds, or expectation of further ratings downgrades for South Africa, will see bond values decline and interest rates rise. In November, South African bonds returned -1%.

Immediately after the rating announcement the R/$ exchange rate strengthened, ending the month 3.4% stronger at R13.69. Although counter intuitive, it is not unusual for a currency to strengthen after a downgrade announcement, and the same goes for share prices. When looking at examples of other country’s downgrades to junk status over the years, there is no link to a weakening currency, or weaker equity markets after a “junk status” announcement.

South African Inflation remained low in November at 4.8%, and this together with low growth, and political uncertainty led the South African Reserve Bank to leave the repo rate unchanged at 6.75% this month.

Compiled by Mike Moore, Wealth Manager