Global Market

The rally in emerging market shares took a breather in September, whilst developed market shares moved up 2% as measured by the MSCI World Index. These gains were made among the noise of Trump’s announcement on tax reform, as well as Janet Yellen’s announcement that the Fed has started to unwind its $4.5 trillion portfolio of government bonds.

Trump’s latest US tax proposal targets a top individual rate of tax of 35% and a corporate tax rate of 20%. As South Africans, with top tax rates of 45% and 28% respectively, and increases in wealth taxes likely, this sounds like tax-rate-nirvana. If successful, lower US tax rates are expected to boost already elevated US markets, however not all analysts believe lower tax will necessarily translate into sustainable company growth, which is what drives markets over the long term.

The other significant announcement this month, made by Janet Yellen the head of the US Federal Reserve, was that the Fed will now begin to reduce its $4.5 trillion portfolio of government bonds. These bonds were bought between 2008 and 2014 in a bid to rescue the US (and Global) economy after the financial crisis, by effectively lowering interest rates to all-time lows. Those with funds in an offshore savings or money market account, will be aware of how ridiculously low interest rates are. Whilst the central banks of Europe and Japan are still buying bonds to stimulate their economies (Quantitative Easing), the US is now entering the next phase of this great financial experiment, which is to allow the bonds that they have bought, to run-off. In other words, as each bond matures, and the principle amount owed to the US Fed is repaid, that money will no longer be reinvested. Whilst this unwinding exercise is expected to be executed extremely slowly so as not to impact markets, it has never been done before, and therefore adds substantially to the list of potential risks that markets face.

On the topic of risk and uncertainty, last week we held a breakfast discussion at our Rondebosch office in Cape Town at which time we explored the offshore investment landscape. The key points made were: (1) there is a real chance that over the next decade, that developed market equities and bonds will deliver lower returns than we are historically accustomed to; (2) there is currently heighted unpredictably in markets caused by changes in the global political landscape, actions of central bankers since the global financial crisis, technological advances and the rise of passive investing; (3) these factors may lead to heightened volatility (especially currency volatility). Our response to these themes is to ensure more than ever that our offshore portfolios are properly diversified across as wide a set of asset classes, geographies and currencies as possible. This diversification ensures that the opportunity to capture positive returns is widely spread. Furthermore, it ensures that when a downturn takes place, the severity of the downturn for our clients is dampened.

Finally, we note that the oil price rallied 9.9% in September, reaching a two year high of $57.54.

South African Market

The domestic political fallout spread like wildfire this month, as well known global multinationals were sucked, kicking and screaming, into the wake of South Africa’s state capture circus. The resilient Rand finally lost some ground, weakening more than 4.5% against both the US Dollar and Pound Sterling whilst after two months of strong gains, the All Share Index, lost 0.8%.

Most domestic investment portfolios perform better when the Rand weakens. This is due to many funds’ permitted offshore allocations being at maximum levels, and the Rand-Hedge flavour of their local exposures. Whilst it is difficult to pinpoint a single reason for currency movements, one factor has certainly been the relative strength of Pound Sterling and the US Dollar, as the probability that interest rates in the UK and the US are likely to go up before the year end, rises. Another factor must be the increasing temperature of SA’s domestic politics as we approach the ANC National Conference, scheduled for 16th December 2017. For those looking to take money offshore before the end of the year, it is prudent to do so sooner rather than later, and avoid the possibility of heightened volatility and potential Rand weakness as we approach this critical point in South Africa’s future.

September brought some improved economic news. The inflation rate remained relatively low at 4.9% and surprisingly the economy grew at 1.1% year-on-year in the second quarter of 2017, meaning we are no longer classified as being in a recession. Notwithstanding the low rate of inflation, the Reserve Bank did not take the opportunity to cut interest rates this month. With no signs of meaningful growth on the horizon, analysts still expect interest rates to be cut a further 0.5% by the first quarter of next year.

This month’s weakness in the All Share Index was predominantly a result of weaker financial shares. During the month, Moody’s assigned a negative outlook to South African insurers and maintained its negative outlook for South African banks, whilst also releasing reports on both sectors. The slightly negative sentiment in the reports impacted the shares of financial companies, further reducing the return of the All Share Index.

Compiled by Mike Moore, Wealth Manager