Trump’s blunt, brash and unpredictable approach to negotiations saw hopes of a May/June conclusion of trade talks with China dwindle. This led to markets losing some of the year’s gains as the MSCI World Index lost 6.1% and MSCI Emerging Markets Index lost 7.5%. South Africa’s All-Share Index followed suit and lost 4.8%.

Trump Trade War – Eruption!

Global equity markets appear to be almost single-minded in their obsession with the progress of US trade negotiations with China. Having spent most of the year “celebrating” a seemingly positive end to tariff discussions, equity markets slumped in May as Trump ruffled feathers by increasing tariffs on $200bn of goods from 10% to 25%. Trump also threatened to apply new tariffs of 25% on an additional $325bn worth of Chinese goods if talks did not progress along certain lines. Tariffs are widely believed to be negative for global growth and a study published by the Federal Reserve Bank of New York has estimated that US households will pay an additional $831 per year due to the latest tariff increase. One can only hope that the reality of the long-term impact that tariffs will have on US citizens and economic growth will keep Trump incentivised to reach an agreement before the consequences of his negotiating style begin to hurt him domestically. In further evidence of the impact of tariffs, The Organisation for Economic Cooperation and Development (OECD) cut its global economic growth forecast for 2019 from its previous estimate of 3.5% (made in the fourth quarter last year) to 3.2%, citing trade tensions as the principal culprit. In addition to this, markets were caught off guard last week when Trump said he would also increase tariffs on Mexican goods unless they take steps to stop a surge of people crossing the border.

US Economy – Recession?

As we have mentioned in our previous monthly updates, the US economy is widely believed to be in the latter stages of its economic expansion. This implies that the next stage of the cycle is an economic slowdown or recession. Historically, a significant indicator of a recession has been the level of the interest rate on 10-year US Treasury Bonds compared to short term 3-month Treasury Bills. In May, for the second time in the past 12 months, the interest rate of the 10-year Treasury Bond (2.29%), fell below the prevailing interest rate on the 3-month Treasury Bill (2.35%). Whilst this may just be a temporary phenomenon and does not mean an impending recession, it does confirm the view that the US is in the latter stage of its economic cycle. Having said this, US Federal Reserve Board Vice Chairman Richard Clarida has said that the US economy remains in a good place and the level of interest rates is appropriate. However, “the market” is expecting interest rate cuts this year.

Brexit – Hard Brexit Back On!

Prime Minister Theresa May has resigned and will leave her post on 7 June at which point the Conservative Party will begin the process of electing a new leader. Brexiteer, Boris Johnson, is leading the race to become the next party leader and will, therefore, most likely to be the person with the most influence on the fate of the UK and Brexit. His most recent comments show that he is less fearful of a No Deal Brexit than his predecessor and he doesn’t appear to be willing to extend the current deadline of 31 October to leave the EU. This heightens the risk of a No Deal Brexit which has been reflected in the move in the GBP/USD exchange from $1.30 to $1.26.

South Africa – A new dawn?

President Ramaphosa is the newly elected President of South Africa and will (hopefully) have 5 years to steady the ship and stimulate both local and international confidence in the country. South Africa is economically moribund, with sentiment plumbing new depths over the past two years. A consequence of this is that contrarian investors, who look for value in the less popular areas of the market, are indeed finding opportunities among listed South African companies. Once invested they wait for a catalyst to unlock the value, and in South Africa even a small change in sentiment could be that catalyst. We wish President Ramaphosa all the best in his endeavours!

Finally, S&P kept South Africa’s foreign and local currency credit ratings unchanged at junk status with a stable economic outlook. Of the three ratings agencies, Moody’s is the only one not to have a junk status rating on South Africa’s credit.

Compiled by Mike Moore, Wealth Manager