June was a positive month for both local and global equities. This was largely in response to central bankers of the world’s major economies indicating they are willing to cut interest rates to sustain growth in the wake of the current global economic slowdown.
Trump Trade War – Kicking the Can Down the Road
Donald Trump recently met with the Chinese President, Xi Jinping, to discuss the latest challenges in their trade negotiations. The outcome was positive with Trump relaxing sanctions against Huawei and announcing that “we are talking again”. It was agreed that no additional tariffs are to be levied on the remaining $300 billion of untaxed Chinese exports to the US at this point. Reports are that negotiations will continue and that no resolution is to be expected before the end of the year. This issue will continue to hang over financial markets until it is resolved or a new status quo is accepted.
The Global Slow-Down Continues
The World Bank has lowered its 2019 global growth forecast to 2.6% from its January projection of 2.9%. For the most part, announcements by central bankers last month have shared a common willingness to cut interest rates in support of the global economy through the current slow-down. ECB President Mario Draghi has added quantitative easing to the mix, and the People’s Bank of China has indicated that it has ample room to ease monetary policy further if the trade war continues. The upshot of these central bankers announcements is that bond markets rallied aggressively in June with US 10 Year treasury rates dipping below 2%, having been above 3% this time last year. On the other hand, the US stock market, as measured by the S&P 500, touched record highs. The consensus is that the US economy is close to the end of its current economic cycle, however, there is no expectation of an imminent recession in the US.
Gold on The Rise
Symptomatic of the global economy and geopolitics, the gold price rose 8% in June. It has been locked in a sideways trading pattern for the past five years. Gold typically performs well when uncertainty and volatility in equity markets are heightened, as is currently the case. Add to this an increasing probability of falling interest rates and consequently a weaker USD, and the traditional case for investing in gold prevails.
Local and Offshore Valuations
The latest report by fund manager research company, FundHouse, points to value in the local and offshore equity markets, notwithstanding the lack of positive news headlines. FundHouse state that “there are currently over 30% of the counters in the S&P 500 trading below a PE multiple of 15 times earnings (decent value by US standards). As recently as late-2017 this ratio was around 10%. In simple terms, there are now three times as many ‘cheap’ opportunities in the S&P 500 than there were a little under two years ago. Locally the picture is much the same, but even more attractive with over 60% of counters trading below 15x PE (the JSE does tend to trade at a relative discount to the S&P, so we would expect this level to be higher). In addition, 30% of shares are trading under a 10x multiple.
Patience is required before this reported value is unlocked, but at some point, it will be.
South African Property
There is a debate in South African investment circles as to whether South African property shares now represent a buying opportunity or if they should still be avoided. Out of the nine calendar years since 2010, SA listed property shares have outperformed SA listed equities in six of them, however in 2018, the property shares lost -25.3%. The sector has not seen signs of recovery since. Reasons provided by the experts in the asset management community for weak property share prices are over capacity following two decades of catch-up; the retail sector being under pressure from online sales, the poor economic backdrop, and less than transparent financial reporting from property companies. The general view is that these issues are not going to go away soon, and therefor there is no rush to buy property shares broadly. There are however opportunities in certain areas of the sector, that are less affected by the aforementioned issues.
Compiled by Mike Moore, Wealth Manager