Global Market

The US equity market continues to be the primary source of good news for investors. Not only has the S&P 500 index now set the record for the longest ever US bull market, but the US Dollar has also been the strongest major currency this year.

US Bull Market Breaks a Record

The S&P 500 extended its bull run in August with a return of 3.26% for the month, bringing the return for the year-to-date to 9.9%. This compares favourably to the UK’s FTSE 100 which is down 0.18% year-to-date. Furthermore, the USD has appreciated by 5.4% against the British Pound and 3.6% against the Euro year-to-date. This means that portfolios with a predominant exposure to US equities, and consequently the USD, have benefitted in 2018.

Love him, or hate him, Trump’s business friendly policies have been responsible for these returns by fuelling company earnings growth, as well as consumer confidence. In August, the level of US consumer confidence reached the highest it has been since 2000.

We track the performance of offshore equities portfolios relative to the performance of the MSCI World Index, which is made up of shares across the world’s developed markets. Year-to-date, this index is now up 3.4%, compared to the MSCI Emerging Markets Index which is down 8.85%.

Emerging Market Stress Continues

Trouble in emerging markets continued to escalate in August. The big question is whether these isolated issues are likely to spread to other emerging markets, causing what is being termed a “full‑blown” emerging markets crisis. In August, issues in Turkey and Argentina escalated, with the Turkish Lira now having depreciated 40% against the US dollar so far this year, and the Argentine Peso having depreciated 50%. Argentina has responded in the expected manner and raised interest rates to 60%. However, Turkey’s President is responding with his own version of economic policy which has no foundation in economic theory, or practice. Through our interactions with asset managers, the prevailing view is that this is not likely to develop into a full-blown crisis. What is unnerving, however, is how South Africa is regularly included in reports as one of the more vulnerable emerging market countries. The reason for this is simply that the South African economy is in an overall weaker position than it was ten years ago, making it more vulnerable to a currency crisis.

Strong US Dollar is Not Helping

Whilst the US Dollar’s strength is indicative of the strength of the US economy, it does have a sting in the tail – it makes the debt repayments of countries that have raised debt in US Dollars increasingly more expensive to service. This in turn increases the pressure on emerging market countries finances. The US Dollar has strengthened due to several factors including rising US interest rates, strong economic growth and, since the trade wars started rumbling, the belief that the US is the team to back!

Trade War Rhetoric Escalates

The US has now implemented tariffs on $50 billion worth of Chines goods, to which China has retaliated. Trump is preparing to impose a further $200 billion. It seems that China will eventually run out of road for retaliation, as it does not import as much from the US as the US imports from China, although there are other “levers to pull”.  What happens next remains to be seen, but perhaps at this point the two parties will begin to resolve the issue, as Trump himself has indicated via his beloved twitter account.

Local Market

Resource shares were up a further 5% in August, bringing the returns for the sector over the past 12 months to 19.7%, and returns for the JSE up 2.3% in August.

Rand Volatility = JSE Volatility

Although the JSE ended the month up, August was an incredibly volatile month for the South African equity market. By the 15th of August, the market was down 3%, before rallying to being up 5% as at the 29th of August. Over the following two days, the market sold off, ending the month up 2.3%. Hopes were high that we had broken the long term sideways trend the JSE is currently entrenched in; but this appears not to be the case for now.

Equity market volatility echoed the weakening of the Rand. The currency began the month at R13.22 to the US Dollar, before weakening 7.4% to R 14.74 as at 16th of August, and then strengthening slightly to end the month at R14.68. Other than the Rand, which has assisted the performance of the shares of South African companies earning their income in foreign currency, resource companies and property companies also contributed to the overall performance of the market.

Property Shares Up in August

After a torrid start to the year, resulting in the property index being down over 20% year-to-date, it had a positive month in August returning 2.1%. Whilst Rand weakness assisted its overall performance, the Resilient stable of companies, which make up a large component of the property index, released their results to which the market appears to have responded positively. There is still a cloud of uncertainty hanging over the Resilient stable of companies. A group of 9 South African asset managers, many of whom are still getting over the shock of Steinhoff, have now requested that the companies conduct a broader forensic investigation to resolve any remaining negative perceptions.

Why is the Rand so Weak?

The Rand has been caught up in the general concerns surrounding emerging markets over the past month, and much of the current weakness has been driven by sentiment related to events in Turkey and Argentina. This sentiment is rubbing off on countries prone to associated problems. The main factors that render a country vulnerable are:

  1. Budget Deficits – the shortfall between income raised from taxes and expenditure
  2. Current-Account Gaps – the shortfall between the value of goods exported and the value of goods imported
  3. Short-Term Foreign Currency Debt – the amount borrowed and therefore having to be repaid in foreign currency
  4. Inadequate Foreign Currency Reserves – to repay foreign debt and to pay for imports.

On these measures South Africa is more vulnerable than it was ten years ago and has become relatively more vulnerable than some of its peers. For this reason, there is heightened “skittishness” when it comes to South Africa, and so as concerns rise, the Rand is one of the more affected currencies.

SA Economic News

Finally, economic data released on a variety of fronts in August was below expectations, culminating in the announcement, at the time of writing, that SA has entered a technical recession. It was not all bad news however, as Cyril Ramaphosa also announced that he has been successful in securing pledges of more than $35 billion in foreign direct investment from China, UAE and Saudi Arabia, and it is likely that there will be similar announcements to come at the October 2018 Investment Summit. With an election looming, it will be interesting to see how the ANC juggles the challenge of keeping the populist vote, whilst creating much needed economic growth.

Compiled by Mike Moore, Wealth Manager