2018/12/13 00:00:00

Global Markets
The S&P 500 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 returning (USD) 1.4% and -0.9% for the quarter and -1.0% and -7.4% year to date.
A spate of news flows 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 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 emerging markets; and a stock market trading at record price-to-sales. 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. MSCI World is up 5.9% year to date, outperforming bonds by 700bp, 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 yearend, as the US dollar is potentially peaking, the US business cycle remains well supported, and there is some stabilisation in emerging markets/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&P500 returns over the next 12 months.
Emerging market (EM) equities have performed poorly in 2018, and were at the recent low point 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 was the drag on the index, shedding 7.8% over the same period. The All Bond Index (ALBI) was virtually flat with a total return of 0.8%, whilst the SAPY returned -1.0% 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 (21.0%) 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 Top 40 Index (ALSI40) was one of the better performing indices for the third quarter of 2018, down -2.72%, ahead of the FTSE/JSE All Share Index (ALSI) which had a return of -2.17% and outperformed the FTSE/JSE Shareholder Weighted Top 40 Index (SWIX40) by almost 2% (-4.19%).
Some of the contributors to the difference in return between the two Top 40 indices could be explained by the relative underweight exposure to Naspers (NPN), which was a big loser this quarter (-12.28%), and the overweight in Rand hedge shares BHP Billiton (BIL) and Richemont (CFR) also contributed to positively to the performance of the FTSE/JSE Top 40 Index (ALSI40). The underweight exposure to Sasol (SOL), up 10% for the quarter, slightly detracted from performance.
During the September FTSE/JSE index review Reinet Investments (RNI) was added to the index while Gold Fields (GFI) was deleted from the index. The one way turnover for the index review was 0.73%.
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 are unrealistic. The JSE trades on a forward PE of just around 13x, which relative to its long-term history, is not expensive.