Monthly Market Update
The South African Medium-Term Budget Policy Statement (MTBPS) delivered by Minister of Finance -Tito Mboweni – on the 24th of October 2018 disappointed the markets as fiscal slippage was not addressed. The bond and equity markets took the news badly and this reaction saw the rand end the month 3.5% weaker against the US dollar, bringing the year-to-date depreciation to -23.4%.
Our local market (as measured by the JSE All Share Index) has underperformed dramatically, weighed down by rising US interest rates, trade wars and turmoil in countries like Turkey and Argentina. Political and economic uncertainty coupled with fears of a further credit rating downgrade have heightened negative sentiments on South African assets. Both domestic and foreign investors shunned local markets in October 2018.
Implications of the news
- The MTBPS
The deterioration in SA’s fiscal policy reflects the combined impact of three key factors namely:
- a decline in tax buoyancy (government is collecting less tax revenue for every unit of GDP growth compared with earlier years),
- a very weak economic environment as evidenced by further downward revisions to government’s GDP growth assumptions, and
- the need for government to provide additional funding to the State-Owned Enterprises, especially SAA and the Post Office .
Stanlib’s economists and various market consensus argue that, in order to accelerate South Africa’s economic performance, the SA government must work hard to significantly improve business confidence through increased policy certainty, implementing infrastructural development, introducing sensible measures to radically improve the performance of key State-Owned Enterprises, as well as ensuring an on-going adherence to monetary and fiscal discipline. Unless more decisive action is taken to chart a new course, the country could remain caught in a cycle of weak growth, mounting government debt, shrinking budgets and rising unemployment .
- The Growth Revision
The Minister of Finance has revised South Africa’s economic growth forecast for 2018 downwards from 1.5% to 0.7% which was in line with market forecasts . However, over the past few weeks the SA government has embarked on several initiatives to lift confidence and economic growth. These include the President’s growth and recovery stimulus announced in late September 2018, the Job Summit in early October 2018 and most recently the Investment Conference held on 26 October 2018 . The aim of these policy initiatives is to promote South Africa as a preferred investment destination. Encouragingly, the recent Investment Conference emphasised the importance of co-operation between government and the private sector, with many cabinet ministers highlighting the importance of policy certainty as a key factor needed to encourage private sector investment.
- The Stock Market
October has never been a good month for investors . Historically, the 1929 crash and the 1987 crash began in October and several October months over the decades have been bad. Historically, some investors will tend to get out of the market in October or earlier in anticipation of a fall in October. This makes the October problem self-fulfilling to some extent and this year was no exception. CSAM has written a couple of articles on the benefits of staying invested and the dangers of trying to time the market .
The local stock market (JSE All Share index) has been negative for most of this year but since the end of August, the local market has shown a strong downward trend which has knocked 15.6% off its value. The index heavyweight, Naspers, lowered the returns by almost 19% over the last two months, being September and October. This downdraft was in line with the decline in Tencent (a Chinese stock of which Naspers holds more than 30%), as well as a broader sell-off in tech stocks.
Please refer to the below graph which shows the growth of the JSE All Share index from the 1st of January 2018 to the 9th of November 2018.
The JSE All Share Price YTD
CSAM thinks that the current stock market prices present a great buying opportunity considering the end of October 2018 prices were similar to those in January 2017. We also think that the stock market was affected by emerging markets risk-on and risk-off sentiments rather than company specific or sector fundamental valuations. Risk-on and risk-off is an investment setting in which price behaviour responds to and is driven by changes in investor risk tolerance. Similarly, it refers to changes in investment activity in response to global economic patterns.
Markets During the Month
- Local equity market (as measured by the JSE All Share Index) followed the global decline in October 2018. The JSE was down 5.76% for the month while
- Global equities slipped even further, down by 7.3%. The down turn in the local market was largely due to losses in the Industrial sector which depreciated by more than 8% for the second consecutive month, ending down 8.4%. Financials and Resources lost 4.1% and 4.2% respectively.
- Listed property (SAPY) edged 1.7% lower in October 2018, making it one of the best performing asset classes for the month.
- Bond index (ALBI) was down 1.7%, mainly driven by the emerging markets sell-off and rand weakness.
- Cash posted a modest 0.6%.
The rand ended the month weaker against all the developed markets currencies, down:
- 3.5% against the US dollar
- 1.1% against the British Pound
- 1.2% against the Euro.
Data from the Bank of International Settlements on real effective exchange rate shows that the rand is still undervalued. However, this does not imply that it cannot weaken further.
The Moody’s credit rating review – which is expected before year-end – still poses some risks to the rand. The markets expect that Moody`s will not downgrade SA but rather change the outlook from stable to negative. However, volatility is likely to follow if Moody’s rating differs from what is expected.
The MTBPS was presented under difficult economic conditions. The weak economic environment, further revenue shortfalls and additional funding requirements by some SOEs meant that National Treasury was always going to have to report further fiscal slippage.
CSAM feels that apart from domestic political and economic factors, local financial markets have been affected largely by emerging markets’ risk-on and risk-off sentiments. Further, we think that in order to boost business confidence and attract foreign investment, the government must fix issues around policy certainty and corruption. The government has already started to implement several initiatives to lift confidence, arrest corruption and improve economic growth. If some of these initiatives are successful, South Africa will be a better investment destination compared to its emerging markets peers like Turkey and Argentina. We expect this to result in massive passive and active inflows which will in turn boost South African financial market performance, economic growth and assist in the reduction of unemployment.
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