“The markets giveth and then taketh away”
Following the relief rally markets gave to investors in April, the JSE has yet again experienced a downward move as investment sentiment towards emerging markets continued to sour in the face of mounting geopolitical risks. A stronger dollar has also been undermining Emerging Markets (EM), which are already under pressure from slower Chinese growth and the looming prospect of trade wars. Since South Africa is part of the emerging markets economies, SA stock market was down in May 2018 and the rand weakened slightly.
The South African Reserve Bank (SARB) left its benchmark repo rate unchanged at 6.5% in May 2018 after trimming it by 25 bps in the previous meeting. The SARB further added that it will closely monitor that the inflation remains within the inflation target rate (3% to 6%) and will adjust the policy stance if necessary.
Cornerstone Asset Management (CSAM) believes that that the current monetary policy stance is accommodative and appropriate given the current state of the economy and the inflation trajectory.
Further to the above, recent GDP figures released by STATS SA showed SA Inc. had a very wobbly first quarter of 2018, declining by -2.2%q/q. The latest GDP performance was well below market expectations, which was forecasting a decline of -0.5%
[WATCH] Finance Minister Nhlanhla Nene responds to shocl Q1 GDP figures
Implications of the above news
- Unchanged Interest rates – it’s all about inflation
The decision to leave the interest rates unchanged in May 2018 was in line with market expectations. The SARB highlighted that the risks to the inflation forecast have moved to the upside. This is mainly due to global developments. Key uncertainties relate to the outlook for the domestic currency and the oil price. Although inflation is still expected to remain largely under control over the coming year, it will tend to drift to the top-end of the inflation target. However, the Reserve Bank highlighted the importance of inflation stabilising around the mid-point of the inflation target (4.5%) and not at the upper-end of the band (6%). The weaker exchange rate, higher oil price, and above inflation increase in public sector wages clearly add upside risks to inflation. Consequently, we expect the Reserve Bank to leave interest rates unchanged for a considerable period while trying to gauge the impact of further hikes in US interest rates on emerging economies.
- Lower GDP – a real shocker!
The worse than expected GDP performance during Q1 2018 was broad-based including sharp declines in agricultural output (-24.2%q/q), mining (-9.9%), manufacturing (-6.4%), trade (-3.1%) and construction (-1.9%). Equally concerning is the fact that while some sectors of the economy recorded positive growth, the extent of this performance was extremely disappointing, with the government sectors recording the strongest growth at +1.8%q/q.
However, we expect that the recent political changes, which have already resulted in improved investor sentiment and confidence, to translate into meaningful economic development in the medium to long term. Further, there has been a material change in the government’s approach to managing key State-Owned Enterprises (SOE) and President Ramaphosa’s “new administration” has pledged to turn the tide of corruption. This, together with other positive developments, such as the decision by Moody’s in March 2018 to keep South Africa’s credit rating on “investment grade”, has created much needed business optimism.
Investors should understand that it will take time for these developments to boost economic growth and household income levels on a more sustainable basis.
- A drop in the JSE All Share – Bump!
We understand that this environment is likely to be difficult for investors and we suggest that your best protection is diversified asset allocation across the various asset classes (equity, property, bonds and cash – both Domestic and Global) in line with your quantified risk profile and staying invested. Please refer to our April 2018 Market Commentary which emphasises the importance of staying invested.
Illustration of market movements
Our markets have suffered from the increased geopolitical events including:
- Disputes between the US and North Korea – recent negotiations hoping to settle tensions
- Italy political instability – coalition government now formed
- Trade wars between the US and China – this remains one the globes single biggest geopolitical risks.
All of which resulted in investors losing appetite for Emerging Markets (EM) assets. However, recent developments have yielded some positive results in trying to resolve some of the above issues.
Even though May was not a good month for our market and indeed, most EM’s, the efforts to resolve the geopolitical events have resulted in June starting very well with the ALSI up +3.5% month to date (ending 6 June 2018). Although we cannot predict how the market will perform going forward, should June continue with its current trend, investors will benefit nicely.
Source: Morningstar direct
Looking over a longer period we can see that it’s nothing new for markets overreacting to either political and economic events. Over the 5-year period seen in the graph below, we can see that markets are positively skewed and over the longer periods of time, patient investors are always rewarded for staying the course – provided they are able and willing to stick around long enough for prices to catch up with improving corporate earnings and balance sheets.
CSAM advices our clients that having a long-term perspective will help you to step away from the noise and take a broader and, more importantly, longer-term view of your investments. We strongly encourage our investment clients to always refer back to their original investment objectives and mandate (which includes investment time-horizon) as set out in their investment policy document.
Source: Morningstar direct
Markets during the month
- SA Equites, as measured by the FTSE/JSE All Share (ALSI) ended the month (-3.5%) lower in May 2018, led by a collapse in financial and retail shares in the second half of the month.
- The SA Listed Property Index (SAPY) had an unpleasant month, falling (-5.9%) in May 2018, in line with the selloff in bond yields.
- The Bond Index (ALBI) shed 2.0% in May 2018 but remains the best performing asset class up 5.2% year to date (YTD).
- The Money Market (SA Cash) posted modest gains of 0.6% over the same period.
The rand ended the month of May 2.2% stronger against the British Pound, 2.4% stronger against the Euro and (1.0%) slightly weaker against the USD. The rand weakness against the dollar was mainly due to the dollar strength which was driven higher US bond yields.
Although the local equity market contracted in May (mainly due to geopolitical events) and the GDP figures were disappointing, there is a growing sense of business confidence that the new Ramaphosa presidency will finally place South Africa onto a path of better economic growth and prosperity. It is now evident that the State is seriously focusing on uprooting corruption in many parastatals. The new leadership appointed at Eskom, Transnet, SAA and PRASA serve as good examples of the resolve to improve governance within all state institutions.
However, SA Inc. significantly needs to improve its economic performance (Annualised GDP growth rates of 4-6% p.a.) if it is to make inroads into current chronic levels of unemployment. Although the global cycle is slowing, growth is still strong, and it is unfortunate that South Africa has not benefitted more from the global opportunities. Nevertheless, we are encouraged by the recently stated priority announced by the new president to seek $100 billion in inward foreign direct investment over the next few years. If this transpires it could go a very long way towards raising the living standards of our society by significantly increasing employment opportunities, infrastructure build and growth.
CSAM understands that we might not have control over some of the factors discussed above (such as inflation, economic growth, interest rates and geo-political events).
However, we can make a concerted effort to educate and encourage our investment clients to stick to their developed investment mandate, which, among other things, covers critical investment aspects such as:-
- Setting out their investment objectives
- planning and establishing how much to invest,
- deciding on the optimal investment vehicles to use
- guiding clients to understand their risk profile (including investment time horizons)
- providing regular portfolio performance updates and reviews,
- And most importantly…..keeping our clients invested!
Reasonable steps have been taken to ensure the validity and accuracy of the information in this document. However, Cornerstone Asset Management (Pty) Ltd (CSAM) does not accept any responsibility for any claim, damages, loss or expense arising out or in connection with the information in this document. The content used in this document is sourced from various media publications, the internet and CSAM internal research. Cornerstone Asset Management is an authorized financial services provider, FSP No. 45700