Global Market

Developed markets, as measured by the MSCI World Index, rose 0.6% in September, while emerging markets were down 0.8%. The bright spot in the world, the US economy, remains extremely strong with business confidence riding high.

US Business Confidence is Sky High

Several US economic numbers hit record figures in September, showing that US business is booming.  One such indicator which reflects small business owners’ plans to expand and to create new jobs was the NFIB Small Business Optimism Index, which reached an all-time 45-year high.

US Interest Rates Tick Up

With US economic strength continuing, the US Fed raised the federal funds rate by 0.25% in September to 2.25%. This is the eighth interest rate hike since the rate hiking cycle began in December 2015. US interest rates are still low in relative terms and continue to provide a strong tail-wind to the US economy. The US bond market responded predictably, with the US 10‑year treasury yield increasing above 3.2% for the first time since 2011. As the US economy strengthens, interest rates will continue to rise until such point as higher rates begin to slow the pace of economic growth – an inflection point that market participants continue to look out for vigilantly.

Trade War Rumbles On

September’s chapter of the Trump Trade Wars brought renewed terms for trade agreements between the US, Canada and Mexico. The trade fight with China continued – Trump imposed additional tariffs on China’s imports to the value of $200 billion, with Trump threatening more tariffs if the Chinese retaliate.

What’s Happening in Italy?

Italy’s debt levels are at 130% of the country’s GDP. In terms of EU rules, each member state is required to implement a policy that targets a level of debt lower than 60% of GDP. In addition, member states must target a budget deficit (the amount a government spends over the amount it earns through taxes) at a maximum of 3%. In the case of member countries with debt levels above 60%, the rule is that the debt level should decline at a satisfactory pace each year. To achieve lower debt levels however, the highly indebted countries need to ensure their budget deficits are as low as possible. Italy initially indicated that it would budget for a reducing deficit of less than 2%, however the government has surprised markets by announcing a plan that will widen the current deficit to 2.4%. With the deadline for final submission of the Italian budget imminent on 15 October, market concern in the region is rising.

Brexit – The Pressure is Rising

As the UK fast approaches the 29 March 2019 deadline for Brexit, the anxiety of all stakeholders is rising. The last practical date for a deal to be signed off by Britain and the EU is at the last European Council Meeting of 2018, to be held on 13 and 14 December 2018. Thereafter the deal must be approved by the House of Commons before 28 February 2019 and ratified by the EU.  Mark Carney, Governor of the Bank of England, recently warned Theresa May’s cabinet that a disorderly Brexit would lead to economic chaos and that the BOE would not be able to come to the rescue with monetary stimulus, as it had done after the EU referendum. On the other hand, Carney stated that if a Brexit deal was struck as proposed by Theresa May to the EU in July, the economy would outperform the BOE’s current forecasts. For those involved in negotiating Brexit, it appears that it may be a busy Christmas break.

Local Market

September kicked off with news that South Africa had entered a technical recession and the nation’s collective sigh was almost audible. This set a negative tone for the JSE. On the bright side, foundations to turn the economy are being put in place.

The JSE is Still Moving Sideways

The Industrial & Financial Indices were down 8.2% and 3.1% respectively in September whilst the Resources Index continued to outperform on a relative basis. The JSE remains frustratingly entrenched in a sideways trading pattern like the one between 1998 and 2003. Five-year equity returns are now 8% per annum which remains way below the equity market’s long-term average. The average balanced fund has delivered 6.8% per annum over the same period. The good news is that the longer we remain in this period, the closer we are to its end, and fund managers are indeed finding investment opportunities, as there is value to be found in shares on the JSE.

Investors Are Losing Patience with Equities

In recent years, Equity Funds have not managed to outperform Income Funds, such as the Prescient Income Provider Fund. Industry statistics show that a consequence of this is that investors have been “chasing” the relatively higher returns of Income Funds by switching out of Equity Funds and into the relative certainty of Income Funds. In fact, the statistics show that investors have been investing less in funds in general than they had invested in 2014 and the preceding years. Investors are clearly frustrated by the low equity returns we are experiencing and have opted to either wait on the side-lines or invest more of their portfolios in funds that deliver a more certain return above inflation. We know that equity markets will eventually deliver higher returns than the cash markets, although we do not know when. As frustration builds, take comfort in Warren Buffet’s words: “the stock market is a device for transferring money from the impatient to the patient”. The other mitigant to an under-performing JSE is of course diversification through exposure to other equity markets – a key pillar of any holistic investment strategy.

Foundations of Hope – Stimulus Package, Mining Charter & Jobs Summit

The JSE is reflecting the investment community’s “we’ll believe it when we see it” philosophy. Despite positive announcements last month and thus far in October, the JSE has not shown a positive response to the announcement of an economic stimulus package, finalisation of the Mining Charter or the outcome of the jobs summit.  However, despite scepticism, economists claim progress is being made. Possibly, the most accurate summation came from Professor Kantor of Investec who said “the economic policy intentions announced by President Ramaphosa were encouraging if only because it made clear that the President fully understands the imperative of faster economic growth.”

The Ramaphosa stimulus package is the re-direction of R50bn worth of spending to areas identified as critical to the growth of the mining, telecommunications, tourism and transport industries. In addition, an Infrastructure Fund is to be established along the lines of a sovereign wealth fund. Whilst this is clearly not in the league of the economic stimulus Trump delivered to the US economy, it is a positive step for a president with limited resources. Views on the package are wide ranging. Some believe “greater government involvement in the economy can only be bad”, others are more optimistic saying that the “Infrastructure Fund has the potential to provide a catalyst for additional private sector investment and job creation”, whilst other remind us that “In the past, whenever government has announced an ambitious infrastructural development programme they have largely failed to focus on implementing the projects in a timeous and efficient manner that adheres to budgets and completion deadlines”. Compared to where we were this time last year, this is huge progress.  From an investment perspective, it must simply translate to economic growth for most to be convinced.

Compiled by Mike Moore, Wealth Manager