2018/12/13 00:00:00

Global Markets
The S&P 500 Index delivered a total return of 7.7% over the last three months, 10.6% year to date and 14.4% since its February lows. Unfortunately, this strength is not shared broadly, with European, Australasian, Far Eastern (EAFE) and emerging markets (EMs) returning (in US Dollar terms) 1.4% and -0.9% for the quarter and -1.0% and -7.4% year to date.
A spate of newsflows from across the globe is currently driving markets. America’s trade war against what seems to be the rest of the entire world remains an ongoing concern for investors. This has led to some participants betting that China will increase their current stimulus programme in the coming months. Trump also made another enemy in the Organisation of Petroleum Exporting Countries (OPEC), publicly calling them out to reduce oil prices by increasing supply. At the same time, focus was on the Federal Open Market Committee, which raised rates again - the third this year - and reaffirmed a hawkish outlook going into 2019 and beyond. It would seem as if another hike in December is almost assured.
Additional to this, the laundry list of potential market headwinds is quite long, with the yield curve that is flattening; disruptive mid-term elections; peak margins; increasing corporate leverage; problems in EMs; and a stock market trading at record price-tosales ratios. Despite this litany of concerns, we think none will cause the transition from market risk to a market problem.
Despite the best efforts by bears, international equities are so far rather resilient. The MSCI World Index is up 5.9% year to date, outperforming bonds by 700 basis points, on a total return basis. The performance, however, is quite US-centric, but it is notable that even accounting for the latest Italy setback, Eurozone equities are also holding up relative to fixed-income this year, with the MSCI Eurozone at 0.7%against bonds at -0.7%. The general market expectation is that there would be further gains into year-end, as the US Dollar is potentially peaking, the US business cycle remains well supported, and there is some stabilisation in EM/Eurozone activity evident. Fundamentally, growth drivers are also far from exhausted. Although the yield curve has flattened, stocks have never peaked before the yield curve inverted. The current yield curve shape is consistent with double-digit S&P 500 returns over the next 12 months.
EM equities have performed poorly in 2018, and at the recent low point were down as much as 20% from January highs. Our best view is that EMs are flattening out as they tend to have a strong inverse correlation to the US Dollar, which could be peaking out.
Prospects for the Rand and other EM currencies have swung as they have moved from being some of the most promising asset classes this year to becoming the worst-performing asset classes in the first half of the year, largely due to tailwinds from the global economy turning into headwinds.
South Africa
After a dismal first-quarter growth print of -2.2%, the second-quarter GDP print was again negative at -0.7%, plunging the economy into a technical recession. Domestic demand remains weak, down almost 4%, with some rebound in exports by 14% helping. Companies continue to run down inventories, detracting from GDP.
In the third quarter of 2018 the FTSE/JSE All Share Index (ALSI) posted a Rand total return of -2.17%. The last three months were anything but easy, especially with the quantum of the downward moves of some of the equity prices. It is also extraordinary how intraday volatility has picked up, and the fact that more than 60%of the ALSI constituents saw a more than 5% intraday move during this period. SA Resources and SA Financials outperformed in the third quarter with total returns of 5.2% and 2.8% respectively, while SA Industrials were the drag on the index, shedding 7.8% over the same period. The FTSE/JSE All Bond Index (ALBI) was virtually flat with a total return of 0.8%, while the FTSE/JSE SA Listed Property Index (SAPY) returned -1% over the same period.
Year to date, the ALSI has posted a total return of -3.8% versus the ALBI’s 4.8% and -22.2% for the SAPY. SA Resources (+21%) have severely outperformed SA Financials (-6.8%) and Industrials (-11.8%) since January 2018.
South Africa remains on a low growth path. The aftershocks of State Capture and policy uncertainty persist, constraining confidence and investment. Structural economic reforms remain slow in coming, though the finalisation of the Mining Charter before the end of the year marks an important milestone.
South Africa needs growth in order to arrest further fiscal, socio-economic and credit ratings decline. Moody’s review of the sovereign’s ratings around middle October is unlikely to deliver any surprises (no change to its stable outlook or its Baa3 rating), though we think there is a chance the review could be delayed until after the 24 October medium-term budget.
The economy should drag higher in the second half of the year as we shake off the worst impact of agriculture after good rains and companies re-stocking ahead of the Christmas season. We remain on track for 1.3% economic growth in 2018, which would be a sub-par outcome, but the second-half growth numbers should look more decent, up 3% off a low base. Consumer confidence is holding up after reaching record highs at the beginning of the year, but business confidence remains in the doldrums.
Performance
The FTSE/JSE Equally Weighted Top 40 Index returned -1.53% over the third quarter, outperforming the FTSE/JSE Top 40 Index by 1.19%. This was mainly due to the large underweight position in Naspers, which slumped by 12.3% over the quarter.
The major detractors from relative performance for the quarter were underweight positions in BHP Billiton and Anglo American, which posted a positive performance over the quarter, as well as overweight positions in Aspen, Gold Fields and Tiger Brands, which delivered large negative returns over the quarter. During the September quarterly index rebalance Reinet was added to the FTSE/JSE Equally Weighted Top 40 Index, replacing Gold Fields. The rest of the shares in the index were rebalanced back to an equal weighting of 2.5%. The one-way churn in the index was about 7.1%.
Conclusion
In South Africa, the sentiment pendulum has swung from optimism, with the new political administration driving business and consumer confidence higher, to disappointment about the latest macro-economic drivers (GDP), which has dampened expectations of a solid economic recovery. Either way, economic mood swings tend to be exaggerated. Also, the expectation that President Ramaphosa will, in one fell swoop, reverse years of neglect and maladministration is unrealistic. The JSE trades on a forward /PE of just around 13x, which, relative to its long-term history, is not expensive.