Adam Ebrahim was educated at the University of Cape Town in South Africa, where he received his B.Soc.Sc (Hons) degree. Thereafter he completed a post graduate diploma in accounting and was admitted as a chartered accountant and auditor in South Africa. Following the completion of his qualification as a chartered accountant, Adam completed the Association for Investment Management and Research’s Chartered Financial Analyst Programme, qualifying as a chartered financial analyst.
Adam has worked for Deloitte & Touche in South Africa and in London and has also gained work experience as an analyst, portfolio manager, director, and partner of a prominent asset management organisation. He currently serves as a member of the South African Minister of Finance’s Collective Investment Scheme Advisory Committee.
Oasis General Equity comment - Sept 18
Over the last year, policy divergence among the largest economies has been reflected not only in their owneconomic performance, but also in that of other economies. A worsening trade environment is likely to exacerbate these divergences, and is a material risk to growth going into 2019. The global cyclical upswing reached its two-year mark and the pace of expansion in some economies appears to have peaked. The synchronised global growth is long gone, leaving domestic demand as the key driver. IMF global growth forecast for 2018 was projected at 3.9% in April this year, however, they will be revising this figure in October. We are at the stage of the policy tightening cycle in advanced economies which has contributed to the build-up of financial vulnerabilities. In this peculiar setting, history suggests a higher likelihood of accidents in financial markets and recent events support this view where markets buffeted by negative headlines from Italy, Turkey, Argentina, and broader emerging markets. Although, there are some idiosyncratic risks, they are being magnified by a persistent and steady Fed tightening cycle and the European Central Bank (ECB) slowly phasing out their Quantitative Easing (QE) program.
Going into autumn, the United States (US) economy expanded at a solid 4.1% over the second quarter of 2018 and 2.9% year-on-year (y/y). Bolstered by pro-cyclical policy, the US labour market is nearing full employment, consumption is robust as wage growth picks up, and investment continues to be boosted by tax cuts, regulatory reforms, and fiscal spending. The confluence of the robust private and public sector has put the US growth on a divergent path from that of the global economy. Across the Euro-zone, growth remained steady in the second quarter of 2018 at 0.4%, while y/y growth declined to 2.1%. The European Commission noted that their aggregate measure of consumer and business confidence declined to its lowest level in more than a year during September. Additionally, all of the economies in Europe will be negatively affected by rising oil prices, persistent geopolitical uncertainty, impacts of Brexit, poor fiscal discipline in countries such as Italy, ongoing trade tensions and the shift to the populist right. However, growth projections remain strong for the area driven by countries such as Germany and the hope that the EU and UK will strike a deal for Brexit.
While the US and other advanced economies are still growing, the short-term concern in the global economy is centered in emerging countries where the growth divergence is becoming more evident. Countries such as Turkey, Argentina, Indonesia and South Africa are suffering from outflows of money, depreciation of their currency and therefore an increase in the burden of foreign currency denominated debt creating a challenging environment for the region.
As emerging markets have come under pressure in recent month amidst continued tightening of US monetary policy, growing noise and action around global trade policies and specific risks in specific countries, South Africa, with its relatively open capital account and twin current account and fiscal deficits, has not been spared. South Africa entered its first recession in the second quarter of 2018 since the global financial crisis of 2009. Although the external vulnerabilities are seen as a source of macroeconomic risk, South Africa’s latest balance of payment data was encouraging. The seasonally adjusted current account deficit narrowed markedly to 3.4% of GDP in the second quarter of 2018 from 4.6% of GDP in the first quarter. This was driven partially by an improvement in trade balance strengthening to 1.4% from a decline of 3.9% in the first quarter. Beyond the third quarter, current account dynamics will be driven fundamentally by the strength of foreign demand and the export commodity prices on the one side and by the strength of domestic demand and Brent crude oil prices on the other.
Following the relatively poor economic performance, President Cyril Ramaphosa announced that the government has formulated stimulus package focused on the reprioritisation of government spending and economic reform. However, there remain difficulties for government to reprioritise spending away from the relatively unproductive labour intensive organs of state and we expect a marginal impact to this shift in spending. In October, we look forward to the Medium-Term Budget Policy Statement (MTBPS) which will dictate the tune until February’s Budget and Moody’s Rating Agency review for South Africa. Although, the probability of a rating downgrade is minimal, Moody’s has warned that SA’s debt metrics and SOEs (stateowned enterprises) are key risks, and can lead to a change in SA’s rating. A strong recovery in GDP growth will be difficult to achieve given ongoing constraints on the consumer and persistently weak business confidence. It was yet another tough quarter for the local equities market driven lower mainly by continuing global trade war worries, Emerging markets contagion fears as well as a South African economy struggling to gain momentum. For much of 2018, investor pessimism has centred on the possibility of the US fuelled trade war developing into a full-blown global trade crisis. The impact of this perceived risk has resulted in emerging equity markets like South Africa being least favoured by global investors. The imposition of US trade sanctions and tariffs on Turkey as well as Turkey’s own internal issues precipitated a volatile phase for Emerging market stocks as Turkey and Argentina contributed to fears of contagion to the rest of Emerging markets. On top of all the external headwinds, SA equity market weakness was further fuelled by the release of weak second quarter GDP data. Overall, for 3Q18, the FTSE/JSE All Share index (-2.1%) has largely been weighed down by the Industrial sector (-7.8%), as stocks like Naspers continue to face pressure. The Resources sector (+5.3%) benefited from the weaker Rand and saw positive returns in the quarter. The Financials sector had a good month of July and a tough September, ending up with a positive return of 2.8% for the quarter. While global trade war (through the global investor channel) and the US interest rate normalisation are still important considerations for the trajectory of our local equity market, we believe local issues are also key considerations. In our view, the recovery in GDP growth and the pace of the recovery, the SARB’s stance on interest rates, and the strength/weakness of the ZAR are major issues in 4Q18. The Oasis investment philosophy continues to emphasise diversification across multiple dimensions. We believe that the disciplined execution of the Oasis investment philosophy will continue to provide relative downside protection in an environment of high uncertainty.
The Oasis General Equity Fund is an actively managed investment vehicle that provides investors with the opportunity to invest in listed equities with the intention of generating capital appreciation over the medium to long-term.