Quarterly update

By Natasha Narsingh, head of Absolute Return, and Patrice Rassou, head of Equities

The key theme of Q2 2018 has been the escalation of trade tensions resulting from US President Donald Trump’s hostile view of his country’s trade relations with its major trading partners. The resulting air of uncertainty was largely responsible for the strengthening of the US Dollar, generally tepid equity markets and broad outflows from emerging market (EM) assets in Q2. The unease around EMs was exacerbated by the fact that elections took place in several key EMs in the quarter (including Turkey, Malaysia and Colombia).

For the year to date, the major driving factor behind world markets has been the increase in US bond yields from 2.41% (on the 10-year bond) to 2.86% by the end of Q2. Added to this were the two Fed rate hikes of 25 bps each in March and June of 2018, which provided a notable explanation for the volatility in world equity markets over this period. Following on from this, the major theme during Q2 was that of a stronger dollar, with the euro depreciating by 5.3% relative to the greenback, sterling by 6% and the yen by 4.1% (over the quarter). The price of gold followed suit, falling by $72, but market volatility was exacerbated by the close to $10 increase in the price of Brent oil (increasing the cost of living globally).

Eurozone risks have escalated during the course of 2018, with the focal point being political tensions in Italy, which we have to remind ourselves is not Greece. The latter had a debt problem that was a containable 2% of the European Central Bank (ECB)’s balance sheet, but Italy is an economy 10 times that of Greece’s and comprises 15% of economic activity within the Eurozone. Moreover, Italy’s debt of 130% of GDP makes it the third largest debtor in the world, with obvious implications each time there is a bout of uncertainty pertaining this sovereign. US ISM picked up from 59.3 to 60.2 over the quarter, indicative of a still-expansionary environment, resulting in a Fed that may be tempered in its hastiness to raise rates quickly. The imposition of US tariffs on imports has been a major event during Q2, with the Trump administration announcing steel and aluminium tariffs from Canada, Mexico and the European Union (EU). As a consequence, one of the major risks to world equity markets is retaliation by in particular China, which could precipitate into a prolonged trade war. The Japanese economic malaise continued, with its first-quarter GDP print showing an unexpected contraction, once again shaking confidence in that economy. This has spurred the Bank of Japan into a fresh round of stimulus to stimulate its economy but also to counteract the planned tax hike to take place in 2019.

The unsettled global mood added insult to injury for South Africa’s own domestic concerns, with the ‘Ramaphoria’ of Q1 making way for the sobering realisation that a number of serious challenges remain before the local economy can stage a meaningful recovery. Higher fuel prices (resulting from a combination of rising crude oil prices and a weak Rand) and the impact of the 1% VAT hike (effective from 1 April) meant the consumer was not in a happy place. A lengthy strike by bus drivers that made commuting difficult for millions of workers, and rolling blackouts caused by Eskom workers enraged with a proposed 0% wage increase, added to the general misery felt by many.

Despite some of the effects of Ramaphoria wearing off, the President and his new Cabinet continued their efforts to improve confidence in his government by taking measures such as appointing new boards at some state-owned enterprises (SOEs) including Transnet, confirming Phakamani Hadebe as the permanent CEO at Eskom, and appointing a panel of respected economic advisors. He also announced his intention to host an investment conference later this year, where US$100 billion of private sector investment would be sought. Whether these proposed measures will have the desired impact on the country’s limping economy remains to be seen.

After a strong Q4 2017 (+3.2%), GDP growth in Q1 2018 came in at a very disappointing -2.2%, with the agriculture, mining and manufacturing sectors making the biggest contribution to this decline. Despite this, no relief was provided by the South African Reserve Bank, with the Monetary Policy Committee leaving the repo rate unchanged at its May meeting, citing the likely inflationary pressures posed by higher fuel prices and the weak rand (despite the fact that current CPI prints remain anchored within the target band).

For the quarter to June, the FTSE/JSE Shareholder Weighted Index (SWIX) added 2.1% quarter-on-quarter. Within equities, SA Resources were 19.6% higher, SA Industrials increased by 5% and SA Financials were 6% lower over the quarter. The SA Listed Property Index, after a sharp sell-off in Q1, declined even further during Q2 with a -2.2% return. The Rand depreciated by 15.7% over the three-month period to end the quarter at R13.71/$. Nominal bonds and inflation-linked bonds were down 3.8% and 5% respectively while cash delivered 1.8%. On the international front, the MSCI World Index posted a return of 1.7% in US dollar terms and the MSCI EM Index declined 7.9%.