Global Market

The momentum in the US economy remained strong in July, evidenced by positive economic data releases. Developed world market returns are once again in positive territory year to date, notwithstanding the vast amount of macro-economic “noise” being digested daily.

US Economy Keeps on Going

The US economy continued its show of force, with more positive economic news in July. Economic growth for the second quarter of 2018 was impressive, with GDP growing at an annualised rate of 4.1% compared to 2.2% in the first quarter of the year. This is the fastest rate of US growth in nearly four years. The US stock market is now showing a positive return for 2018, up 2.7% year to date. July’s return of 3.7% lifted the shares of developed countries as measured by the MSCI World Index, up 3.1%. Analysts and commentators are anxiously searching for signs of the end of the US economic growth story and although there are always areas of concern, there appears to be no signs of an imminent economic slowdown.

Emerging Markets Vs Developed Markets

Emerging markets also had a positive month in July returning 1.7%, however they have had a tough 2018 thus far. As South Africans know too well – capital flows into and out of emerging markets have a collective impact on emerging market currencies and financial markets. Following a year of inflows in 2017, the higher oil price, concern about the impact of trade wars and a steady rise in US interest rates, have caused portfolio managers to aggressively reduce exposure to emerging markets in the past few months. This has resulted in an outflow of foreign investment. In 2017, both developed and emerging markets rallied together, however this year, the two have moved in different directions, with emerging markets down 7.6% thus far in 2018. This type of volatility is typical of emerging markets and some global investment houses believe the emerging market sell-off presents an opportunity, whilst others see emerging markets as excessively risky at this late stage in the economic cycle. Typically, offshore balanced funds with a moderate risk profile have most of their exposure to developed markets. Whilst they may choose to have exposure to emerging markets, this is typically low, due to the volatile nature of emerging markets.

Brexit impact on returns of the UK’s FTSE 100

The complexity of negotiating, let alone implementing, a Brexit deal becomes more evident as each week passes. In July, Prime Minister Theresa May presented ministers with her vision of a Brexit deal in a 90-page document known as the Chequers Proposal. No sooner had the ink dried on the proposal, heavyweight Brexiteers in the conservative party had resigned in protest, as they deemed the proposal to be too soft and therefore not delivering on the referendum promise. Theresa May is battling to get a deal through parliament that will be acceptable to the EU negotiators. Adding to the complications is her fragile support base and she may well be ousted before crossing the finish line.

KPMG recently published a report on the impact of Brexit on the UK stock market since the referendum on 23 June 2016. It explains that the difference between the share performances of companies that operate largely inside the UK, who are more vulnerable to Brexit, and companies that operate globally, has almost reached a historic high. This has resulted in the UK stock market underperforming relative to its peers in the developed world substantially. Since Brexit, the FTSE 100 is up 24% in US Dollar terms, whilst the S&P is up 34%, and GBP/USD exchange rate is 8% weaker.

South African Market

The FTSE JSE All Share Index ticked down another 0.2% in July, bringing the return for the year to 1.7%, leaving South Africans to rely on their offshore exposure for Rand returns thus far in 2018.

Desperately Seeking Consumers – South Africa Growth Remains Low

The Reserve Bank kept interest rates unchanged in July whilst revising its growth forecast down from 1.7% to 1.2% for 2018. This simply means that the Reserve Bank does not see growth picking up this year. Consumer spending is responsible for over 60% of South Africa’s GDP figure, so any improvement in this area of the economy improves South Africa’s GDP growth. Factors that have dampened the consumer spending lately include tax increases in the February National Budget, increases in the petrol price, no cuts in interest rates since March, and low employment growth.

On a positive note, some fund managers are positioned to benefit from a pick-up in South African growth as they expect an increase in consumer spending to take place over the next two years. They believe that the outlook for consumer spending is improving, this points to a rebound in consumer confidence stemming from the Reserve Bank’s interest rate cut in March, “higher than inflation” public sector wage increases, improved political and policy certainty, and benign inflation. However, as pointed out by Professor Brian Kantor, Chief Economist and Strategist at Investec Wealth and Investment, the value of the Rand is a key determinant of inflation and more weakness will further dampen the consumer spending.

This low consumer spend has translated directly into weak performance of South African Retailers on the JSE: The General Retailers Index is down 24.5% since the 7th of March – levels last seen in late 2012.

Resource Sector is Best Performer in 2018

To find some light on the JSE, one needs to look at the resource sector which has been the best performer in 2018. Resources have benefitted from a combination of global growth and a weak Rand/strong US Dollar having returned 12.7% for the year. This year commodity prices have improved, although they have ticked down in July in response to the threat of trade wars. Some asset managers see this as the beginning of a longer-term bull run in commodity prices.

Property Sector – not as bad as it seems

As has been discussed in previous market updates, the South African property sector has had a horrendous year thus far following a huge slide in the share prices of the Resilient group of property shares. Research by Stanlib shows that excluding the Resilient stable of companies i.e. Resilient, Nepi Rockcastle and Fortress B, the Property Index is down just 3.2% so far in 2018. This clearly indicates that much of the index hasn’t actually done that badly, especially considering it had a good year in 2017.

Value is Creeping Back into Local Shares

After four years of low returns, asset managers are reporting that they are beginning to find value in South African shares. Both Investec Securities and Sanlam Private Wealth report that they are finding that the JSE All Share Index is starting to show value relative to its long term historical average PE ratio, as well as relative to current valuations of global shares.

Compiled by Mike Moore, Wealth Manager