After a brutal final quarter of 2018, during which developed world equity markets lost 13% and the JSE All Share Index lost 5.33%, January brought a moderate recovery in share prices. Commentary remains focussed on the rate at which global economic growth is slowing, particularly the impact that politics will have on markets in 2019.
Global Growth is Slowing
Several of the largest countries in the world released data during December and January showing that the rate at which their economies are growing is indeed slowing. Whereas 2017 was a year in which “synchronised global growth” was the order of the day, the world has entered that part of the economic cycle where the speed at which economies grow peaked in 2018, and is now beginning to slow. Asset Managers try to anticipate what is to come, and so during the last quarter of 2018 they adjusted their exposures, and sold-off shares around the world. Concerns will now shift to the extent of the slow down, and particularly, the impact politicians and their policies could have on growth.
One US Interest Rate Increase Expected in First Half of 2019
As the world’s largest economy, US policy takes centre stage, particularly the direction of US interest rates. During 2016 and 2017, US interest rates steadily rose from post crisis level of 0.25% to the current level of 2.5%, as the US economy grew. Now, as growth slows and US interest rates reach historical norms, the US Fed has indicated that interest rate increases will be slower in 2019 – the current expectation is for only one further interest rate hike in the next 6 months.
Trump Trade War – Will it be Resolved in February?
There is laser focus on the impact that Trump’s trade war might have on global growth. The US and China have agreed a deadline of 1 March 2019 to reach a trade agreement. If no deal is agreed, the US is scheduled to increase tariffs on $200 billion worth of Chinese goods on 2 March 2019. Expect plenty of commentary on this during February.
Brexit – The Three Options ….
The treaty negotiated between the United Kingdom and the European Union by Theresa May did not go down well in the UK parliament, and was voted down by a huge margin of 230 votes, the largest margin in modern British history.
The main options open to the UK, as summarised by Overberg Asset Management, are (i) the UK leaves on terms similar to the existing withdrawal agreement but with a slight variation i.e. a Norway-style membership of the European Free Trade Association (ii) the UK leaves the EU without a trade agreement (iii) the UK does not leave the EU at all (with or without a second referendum). Analysts at JPMorgan believe the probability of “no Brexit” lies at 40% and the probability of “no-deal” lies at 10%.
SA Asset Managers Agree – There is a Strong Case for Positive Returns in 2019
Throughout January, the traditional “Asset Manager Outlook for 2019” arrived in our inboxes. These outlooks carry one message in common – SA shares are offering value and are expected to show positive returns in 2019. 27Four Investment Managers provided an interesting insight noting that 2018 was one of the worst years for the JSE ALSI Index – over 70% of shares in the index had negative returns, which is the highest percentage for any calendar year in the last 25 years apart from the 2008/9 global financial crisis. Stanlib noted that based on history, the JSE ALSI has a high probability of strong returns after such a bad year, explaining that the last four occasions when the JSE had over 60% of shares in negative territory in a calendar year was (i) 1998 Asian crisis (ii) 2000 Tech bubble (iii) 2008 Financial Crisis and (iv) 2015 End of QE. Each of these periods were followed by periods of strong returns. Coronation Asset Management’s outlook report added to the narrative, saying that there is “an unusual confluence of value in the local market, both in the rand hedges (examples include British American Tobacco, Quilter and Anheuser-Busch InBev) and in domestic stocks”.
Whilst the experts tell us that SA shares offer value based on what is currently known, events can always lead to a different outcome. For this reason, whilst we are optimistic, we remain patient should the outlook not materialise in 2019.
Compiled by Mike Moore, Wealth Manager