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A tough investing year behind us, what now? 

Looking back at the year that was.
Giants such as MTN, Aspen and Tiger Brands declined by over 40% during 2018, while a few other well-regarded names fell more than 30%. Picture: Siphiwe Sibeko, Reuters

It has been an extremely challenging period in markets. Investors are disillusioned, while their portfolio managers have been humbled. A manager whose style maintains a bias toward the large-cap sector of the JSE likely suffered negative returns regardless of their selection decisions. Giants such as MTN, Aspen and Tiger Brands declined by over 40% during 2018, while a few other well-regarded names fell more than 30%. Naspers lost about a fifth of its value since the beginning of the year and even the ever popular property sector fell by a similar amount. 

Given this backdrop, it may be useful to take a step back and examine the environment in which we have walked through and the uncertainties that persist.

Global

From a global economic perspective, it seems that the US found the last remaining chair at the party. Growth outperformance from this region, while keeping up with a tightening monetary policy stance, resulted in pressure increasing in other corners of the market, particularly in emerging markets. The prospect of rising US bond yields with little-to-no inflation risks (yet) has meant that the US provides real returns of close to a percent – a situation that has not materialised since shortly after the global financial crisis of 2008. Given the lofty levels of company price/earnings (PE) multiples over the past few earnings’ cycles, 2018 has been the year in which the investors began to appreciate the lower risk-adjusted returns earned from bonds.

In China, the slowdown in growth indicators seems set to continue into 2019 as the relatively minor ‘targeted easing’ measures seen so far appear to have had little effect. Furthermore, one cannot talk about Chinese economic growth without referring to trade and what has been quite strong data. We, however, remain watchful and would regard improving indicators as tariff ‘front-running’ across broader Asian markets and would caution for a notable reversal in Q12019.  

Although emerging markets had a very turbulent year, with the MSCI EM Index falling by about a quarter, there are some early signs that the worst may be behind us. Oil fell by around 30%. This should boost heavy oil-importing countries such as India and South Africa. There also seems to be signs of a mood change by the US Fed over the future trajectory of their interest rate policy. If the Fed hikes less than expected, this should translate into a slightly weaker dollar, thereby boosting EM currencies and helping along the carry-trade once again. 

South Africa

Having come through multiple years of declining growth and rising risks to South Africa’s sovereign rating, SA equity markets took on the brunt of an emerging market basket that faced significant pressures. As it stands, foreigners have been net sellers of SA equities since 2015 and turned net sellers of our bond markets in 2018 on a year-to-date basis. This compares to an emerging market peer group that has enjoyed net inflows in equities over recent years, with net outflows being recorded in 2018 for the first time in over four years. 

On valuations, the MSCI SA ex-Naspers Index is trading on forward PE multiples of around 11.6x, levels not seen since May 2012. Some have even argued that current levels are reflective of an equity market that is fully pricing in recessionary conditions in the economy.

So, what then are our expectations for 2019? 

In the first instance, we are keenly aware of the prevailing difficulties faced by both government and the private sector in stimulating economic growth. The medium-term budget policy statement (MTBPS) highlighted the extent of deep fiscal challenges facing South Africa and evidence of reform will be necessary to boost confidence and yield higher private sector investment. We note however macro indicators that should provide some respite, providing a good basis for an acceleration in economic reform:

  1. A competitive currency.
  2. A stable inflationary outlook.
  3. Household balance sheets that repaired in the tough times.
  4. A reform package of R290 billion and the creation of an infrastructure fund that leverages the private sector for implementation.

Indeed, we should admit to ourselves the exuberance and over-optimism that we shared as a nation at the turn of 2018, over-estimating the pace of reform and ignoring the realities we face in unemployment, state-owned entities and many more policy mis-steps taken in the past. Despite this, the deliberate reforms and positive judicial processes currently underway are hard to overlook. Many anticipate that the president needs to move through the upcoming 2019 election before cementing his ideal cabinet and fully enacting his vision for reform in the country. We would only revise our growth estimates at each incremental change.

Essentially, given the deep declines in some of our mainstay stocks together with a slightly better mood in the country than previous years, we would support positioning for a recovery in returns when considering the risk asset classes, notwithstanding the various risks evidenced on the horizon from trade wars to land expropriation without compensation.

Nkareng Mpobane is chief investment officer at Ashburton Investments.

COMMENTS   6

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Dear all – Please stop using the word ‘challenge’ instead of the real words like – problem, disaster or dysfunctional. eg we do not have a fiscal challenge – we have a serious problem!!!!!!

I started this habit where I stop reading as soon as the word “challenge” appears outside sport context. I find this newspeak rather patronizing.

My reading is now limited to classic Victorian novels.

“Confound it! It’s just because nobody does anything that things have come to this pass!” – George Gissing, New Grub Street

A slightly better mood in the country …..are you smoking grass my friend …the only news in SA is a daily stream of disasters , continuously moving from bad to worse …bankcrupt SOE,s , state hospitals closing due to mismanagement , ridiculous lowering of university entry level requirements , out of control serious crime , bankcrupt municipalities , power outages , with land expropriation as a Xmas present …life is going to get a lot worse before ( or rather if ) it will get better .

Good article Nkareng. You mention prevailing difficulties faced by both government and the private sector in stimulating economic growth, one could also add the difficulties faced by the ordinary citizen who is often absorbed into either the private sector, government structure or an outsider being unemployed. This citizen is the consumer, the driver of markets and collectively the heart of the country. As mentioned in your article there are attempts at reforms and positive judicial processes, albeit small and slow and more than often pushed in reality by organisations driven by SA citizens, not the government itself. This citizen has to survive in a country beset by discriminatory laws/policies within the economic environment, and also in other environments (e.g. academic environment). Would it not be wonderful if the government would remove its racially motivated laws/policies from all environments and leave SA citizens to participate in all spheres of life as equals? Instead they are continuously driven into a mesmerized state where one citizen must feel wronged, advantaged and this is now a right, and the other must feel wronged, disadvantaged and this is now a punishment. Is this a recipe for nation building? Will this get everyone working together in the economy? For the SA economy to thrive and for SA to thrive as a nation, the heart of this country must work together as equals throughout all spheres. Currently we see racially motivated (resulting from government policies) trends in the economy and academic environment, easily exploited by the criminal component in society; there are a multitude of examples of this, and they have led to the exuberance and over-optimism you refer to by moving one man out of a leadership position. Imagine the life that will be pushed into SA if we get rid of all these nation dividing devices that have been set up by the government. Even if originally well intended, it is time to get rid of these things so that South Africans can live and work together (undivided by deliberate social engineering) as a nation. Divided we fall.

How many bear markets has the CIO of Ashburton experienced as an investment specialist?

We appear to be heading back to the Bush , destroying rather than building a nation !!

End of comments.

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