Global Market

Trump ramped up trade tariff talk in June, causing ripples in financial markets. The MSCI Emerging Market Index, which rose 37% in 2017, is down 6.6% this year, dragged down by the Chinese stock market which is down 13.9% so far this year, having lost 7.9% in June.

Trump’s Trade Talk in Context 

World markets were ticking along just fine in June, until Donald Trump decided to bring out the big guns in his trade fight with China. The fight started in March with Trump announcing the imposition of tariffs on US imports of steel and aluminium products. Since then, China (and other countries) have retaliated with the announcement of tariffs to be imposed on US products. Tit-for-tat exchanges continued through April and May, culminating in Trump announcing the imposition of tariffs on $50bn worth of Chinese products, $34bn of which are to be implemented imminently on 6th July 2018. China responded defiantly, announcing tariffs on $50 billion worth of goods on US goods, and in classic Trump-style, on 15th June he announced tariffs on $200 billion worth of Chinese goods. This announcement broke investors’ resolve, and led to a panic sale of emerging market bonds and shares over the next few days. To put the $200bn in context, the US exported $506 billion worth of goods to China in 2017 and China exported $130 billion to the US, so this is a big number. Investors are concerned that firstly, the tariff threats could impact confidence, as companies will hesitate to invest without knowing whether tariffs will be applied to their products or not. Secondly tariffs, once imposed, will increase the cost of goods and depress demand, slowing global economic growth.

US Growth Remains Strong, Fed Increases Rates 0.25%

Notwithstanding the tariff talk, the US economy and the engine for global growth, continued to release strong data in June, supporting views that growth remains on track. In line with this view, the US Fed raised the federal funds rate to 2%. This is the seventh interest rate hike of the current rate‑hiking cycle. In comments following the meeting, Fed chairman Jerome Powell was positive on the outlook for the US economy, pointing to record-low unemployment and still-low inflation, forecasting the US economy to grow by 2.8% in 2018. It’s difficult to see why Trump would put the current US growth trajectory at risk with widespread tariffs, which is why hope remains that the inflammatory talk will result in trade deals, not trade wars.

ECB Ends Quantitative Easing

Following the financial crisis of 2008, central banks globally implemented Quantitative Easing (QE) programmes which involved printing money to purchase bonds to effectively stabilise and revive the global economy. Gradually, as economies have recovered from the crisis, central banks, starting with the US, have ended their QE programmes. The European Central Bank has announced that it will reduce the volume of its bond purchase program from €30 billion to €15 billion a month starting in October and then reducing to zero at the end of the year. Surprisingly, the ECB also announced a commitment to keeping interest rates at their current, extraordinarily low levels until at least mid‑2019, and in any event for ‘as long as necessary’. This announcement is positive for equity market investors, who are concerned about the risks associated with rising interest rates.

South African Market

The FTSE JSE All Share Index gained 2.8% in June, having recovered from being down as much as 4.5% on the 26th June. Volatility was high, as South African markets were caught up in the sell-off in emerging markets, combined with the release of domestic negative economic data. This resulted in the Rand weakening 8.1% against the US Dollar and 7.3% against the British Pound. 

SA Equity Markets – Don’t Throw in the Towel!

After another month of volatile equity markets and a -1.7% return for the All Share Index, year to date, the temptation exists to sell local equity market investments and adopt a “wait and see” approach. If you feel a bit jaded in current markets, it is for good reason. Over a four-year period beginning July 2014, the JSE has returned 6.2% per annum, a return substantially below its long‑term average, and below the returns one could have earn by simply investing in a money market fund. Of course, during such times, we attach our own reasoning as to why equity markets are underperforming and easily convince ourselves why it is unlikely to change. However, over time, it is indisputable that equities provide the best returns, by far, compared with all other asset classes. Investing in a money market fund may be safer and more certain in the short‑term, however over the long-term they provide lower returns and less protection against inflation. Analysis by equity portfolio managers, Overberg Asset Management, provide some food for thought: “The equity market rarely performs as expected and so investors who try and time the market may lose out on periods of strong performance. Around 80% of the equity market’s gains occur in just 20% of the time. Time in the market is more important than timing the market. In the past fifty years, there has never been a period longer than five years in which South African equities have not outperformed cash”. As we enter the fifth year of a four-year period that has seen equity markets underperform cash, will the next 12 months see this track record maintained or will it be the exception to a 5-year rule? Regardless of the outcome, equity markets are extremely unpredictable, and patiently waiting out periods of underperformance are the key to generating long term inflation beating returns. Just like the Cape Town rain, equity market returns will come.

End of Ramaphoria – Economic Data in June

Following the euphoria of being brought back from the brink of disaster by the election of Cyril Ramaphosa at the ANC Elective Conference last year, economic realities are coming back to the fore, and impacting the Rand.

Perhaps the biggest economic surprise in June was the news that SA’s economy shrank by 2.2% in the first quarter of 2018 compared to the final quarter of 2017. This is the largest quarterly fall since the second quarter of 2009 and provided the first blow to the Rand in the month which weakened immediately following the announcement.

Following this was the news that South Africa has been unable to sustain the trade surplus that persisted throughout 2017. A trade surplus means we export more than we import and is supportive of the Rand, and vice versa. The reduction in exports was aggravated by the strength of the Rand following Ramaphosa’s election, and according to Standard Bank economist Kevin Lings, the deficit is expected to continue in 2018. This makes South Africa and the Rand vulnerable to general emerging market weakness – a prevalent theme given the trade war rhetoric and rising US interest rates.

Offshore Exposure is Essential

Given the circumstances described above i.e. a combination of underperforming local equity markets, and the prospect of a weak Rand, we are reminded that this is best managed through a well-diversified portfolio with a healthy offshore allocation.

Compiled by Mike Moore, Wealth Manager