Global Market

Global shares continued to sell-off in March, bringing the MSCI World Index down a further – 2.4%. The Index is now down -6.6% since 1 February 2018 and down – 1.7% since the beginning of the year. Notwithstanding this, on balance, sentiment remains cautiously positive, although markets are skittish.

Why Global Equities Fell in February – The Trump Trade Grenade

In February, investor concerns focussed entirely on rising interest rates (and they are still a concern!) However, this was not a topic that raised new concerns for equity markets in February – the yield on the 10 year US treasury bond ended the month at 2.75%, lower than last month’s yield of 2.85%. In addition, the US Federal Reserve raised its benchmark interest rate by 0.25% to a range of 1.50 -1.75%, which had been anticipated by equity markets. Two to three more US interest rate hikes are expected this year.

What did worry investors in March was President Trump, who, in his inimitable style, giving US steel and aluminium producers a boost, by slapping steel and aluminium imports with a 25% and 10% tariff respectively. This raised fears that countries may retaliate with reciprocal tariffs, effectively smothering global trade and the growth which is underpinning the positive outlook for company profits and stock markets. Whilst the risk of a damaging trade war is real, there is hope that this is simply “The Donald’s” way of opening a round of constructive negotiations on the topic, particularly with China. His point is considered a valid one by many, but it would be less anxiety inducing for markets if he dealt with it differently.

Global Sentiment Remains Positive

Inflation in the G20 economies remained at 2.5% for a third month in a row. This means that the much anticipated (and feared), global inflation beast remains in hiding. In addition, the Organisation for Economic Cooperation and Development (OECD) raised its forecast for global growth for 2018 from 3.7% to 3.9%. The OECD noted improving growth in most countries and “significant” growth accelerations in the US, Germany, France, Mexico, Turkey and South Africa (See the table below for SA GDP growth in Q4 2017). In support of this positive backdrop, reputable US surveys measuring consumer and business sentiment, reported positive results in March. This leads many to conclude that the environment remains positive for equity market returns in 2018, as long as there are no shocks to the system.

Twelve Months to Brexit!

The UK will leave the EU this time next year – on 29 March 2019. Negotiating parties have agreed on a “transition period” of 21 months stretching from 29 March 2019 until the end of 2020. This effectively extends the UK’s participation in the EU for an extra 21 months allowing for preparation for a complete departure from the trading bloc in 2020. As for the future, nothing has yet been agreed, and so watch out for much snarling and gritting of teeth in the months ahead, as the business-end of negotiations will begin!

South African Market

The All Share Index was down -4.2% in March, taking returns for the year to date to -6.0%. General sentiment was buoyed by a positive rating review by Moody’s as well as the Monetary Policy Committee’s (MPC) decision to cut interest rates. Both impacted positively on bond prices which rallied a further 2.1% in March.

Why Was the JSE Down in February?

Naspers represents approximately 25% of the JSE All Share index and delivered a -12.2% return in March. As such, it was responsible for more than half of the JSE All Share Index’s -4.2% return. This however shouldn’t detract from the fact there was a broad-based sell-off across resource, financial and industrial shares, in sympathy with the trade war concerns of global markets. The JSE ended the month –10.07% down from the high reached on 25 January 2018, implying that the current selloff meets the official definition of a “correction”.

Confidence in SA is Up!

The composite RMB/BER Business Confidence Index (BCI) which measures business confidence in South Africa, rose by 11 points from 34 points in the fourth quarter of 2017 to 45 points in the first quarter of 2018. Although it is still below the key 50-point level, implying a lack of overall business confidence, the BCI has seldom risen so quickly since inception of the survey in 1975. The BER also commented that “If sustained, the first quarter rise implies a much-improved economic growth performance this year and next, relative to 2017’s 1.3% GDP expansion”.

Adding to the positive sentiment was Moody’s decision to keep South Africa’s credit rating unchanged and (unexpectedly) revising the outlook from negative to stable. Their review was accompanied by a positive statement on the changes in South Africa since December 2017.

Furthermore, the Monetary Policy Committee added to this by announcing a 0.25% interest rate cut which brings the prime lending rate down to 10%. Reserve Bank governor, Lesetja Kganyago, accompanied this announcement with comments that the SARB is targeting inflation around 4.5% p.a. over the next 5 years. He also commented that the Rand is now “somewhat overvalued”.

Land Expropriation is On Our Minds

This topic has been repetitively raised as a concern by clients this month. There is no indication of how this will play out, however one would hope that President Ramaphosa’s agenda to grow the economy through investment in growth industries, root out corruption and manage transformation issues like land reform, will lead to a balanced outcome. In the meantime, as advisors, we stick to our mantra of managing risk through diversification and exposure to direct offshore investments.

Trying to Buy and Sell at the Best Possible Moment Is a Fool’s Errand

You may wonder why we don’t reduce exposure to equites before the sell-offs, such as we are currently experiencing. We don’t know when markets will go up or down, and history proves that trying to forecast this leads to wrong decisions and poor long-term investment results. Once a decision has been made to achieve higher long term returns through investment in a mix of asset classes, our focus as advisors is to ensure our clients invest according to their risk profile, and then stay invested for as long as possible. The timing of an investment becomes negligible, the longer clients remain invested. Encouraging clients to adopt this philosophy, thereby ensuring they achieve their long-term investment objectives, is central to our role as advisors.

Compiled by Mike Moore, Wealth Manager