Monthly Market Update – July 2018

– Rich Mashayanyika, Investment Analyst

Markets in July 2018 were mainly dominated by the U.S economic growth data which accelerated by an impressive 4.1% q/q in Q2 2018. The improved growth being boosted by consumer spending, solid business investment and net exports. However, some of the growth came from a burst of exports that analysts warned could be a temporary response to looming trade tariffs. On other hand, the Britain’s central bank (Bank of England) raised its base rate of interest from 0.5% to 0.75%, its second hike in less than a year as it continues the process of slowly normalizing monetary policy following more than a decade of unprecedented stimulus.

In South Africa, the unemployment rate rose to 27.2% in the second quarter as a further 90,000 jobs were shed. Although off its worst levels, unemployment in South Africa is expected to rise further in 2018 as business and consumer confidence continue to fall considering the lack of clarity on land expropriation without compensation.

Implications of the news

  • The US GDP

From a global perspective the strong US economy seems to be detaching from the global economy as there are signs that the economies of both Europe and China are slowing. This suggesting that the protracted growth cycle is finally losing steam in those regions. However, the strength in the US economy still means that there is a risk of global interest rates going higher. Rising interest rates can be a headwind for equities which means that even if earnings remain strong, US equities may not advance from current levels. The current global economic cycle has been long by historic standards, but notwithstanding strong growth from the US, is now showing signs of late cycle exhaustion.

  • SA Unemployment

Despite SA growth stalling in the 1st Q, all is not lost, but merely paused. Rhamaposa is still the best thing to happen to South Africa in years, witnessed by recent large Foreign Direct Investment (FDI) being promised by the Chinese and United Arab Emirates countries. The detractors will argue that these countries will want their pound of flesh, but FDI is much needed in South Africa and if it can lead to job creation and growth, on balance it will probably be good news for this country. We have seen the Chinese helping to finance Eskom’s debt, with further debt, which will help in as much as it gives Eskom time to deal with corruption and productivity of its work force. It does not solve the debt problem, but it does buy time.

Source: Bridge Fund Managers

Markets During the month

Given that the JSE has delivered low absolute total returns on a three-year basis, Cornerstone Asset Management (CSAM) understand investors` frustration and the desire to throw in the towel. However, in order to protect client’s savings, CSAM can with conviction say that selling now would be a fatal mistake. Academic research on mean reversion theory states that investors can make money by buying after shares have been de-rated and are trading below their historical averages. The theory entails that over the longer (term, approximately 3 to 5 years), these stocks tend to revert to their long-term averages. If we apply our minds to this investment theory, we can suggest that the current environment might be a very good time to invest.

  • Global equity markets pushed 3.1% higher in July 2018, largely reflecting an indifference to the looming global trade war. Global investors seem to be more encouraged by the continued positive momentum of the US economy.
  • Local equity market (as measured by the JSE All Share Index) did not follow global markets higher in July 2018 with the firmer rand hurting the returns later in the month. The FTSE/JSE All Share Index weakened 0.2% in July 2018, with the resources and industrial indices acting as the larges drags on the overall market. The financial sector was up supported by a strong rand and the industrials lost ground down 2.0% during the month.
  • Listed property (SAPY) edged 0.5% down in July 2018
  • Bond index (ALBI) added 2.4% supported by the rand strength
  • Cash posted a modest 0.60%.

The rand ended the month stronger against all the developed markets currencies up:

  • 4.2% against the US dollar
  • 4.2% against the British Pound
  • 3.5% against the Euro.

The rand was supported by sentiment following President Cyril Ramaphosa`s announcement that Chinese President Xi Jinping had pledged to investing $14.7 billion dollars during his state visit to the country ahead of a Brics summit

In Summary

Local equities were mixed, but Global equities performed well. Bonds outperformed equities but Property continued to lag. Domestic bonds had a good month, outperforming equities largely due to bond yields at the long end of the yield curve falling about 25 bp over the month. SA property remained out of favour producing yet another disappointing result in the month despite a good performance from bonds.

The SA economy remains trapped in a low growth cycle. Unfortunately, the critical unemployment situation in SA was brought further into focus as the official unemployment rate for March published in the month increased by 0.5% to 27.2%. This high and rising figure is a consequence of a poor economy that is not yet showing signs of improvement.

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

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