Monthly Market Update
After a rocky 2018, global markets closed the first month of the new year on a high note. The Federal Reserve left their interest rates unchanged at 2.5% in line with market expectations, reaffirming its position to be patient with future rate hikes. Locally, South African equities managed to continue with a solid December performance, up 2.8% in January 2019. However, the return somewhat lagged Emerging Market peers and the MSCI World.
Sentiment towards South Africa was mixed with President Cyril Ramaphosa continuing with his investment drive at the World Economic Forum in Davos. Foreign investors appear to be somewhat reassured as to the country’s growth prospects.
One of the greatest current causes for concern is the damage that state capture has caused over the past few years especially considering all the senior government officials implicated in the graft scandals. The President contentiously referred to this period as 9 wasted years. More positively, president Ramaphosa remains upbeat on arresting corruption and state capture culprits. However, the reality of the task ahead, for government and the private sector, means that we will all need to dig deep as a country and harness our collective resources to re-build our beloved South Africa.
On the other hand, the rand remains one of the most volatile and most traded currencies in the world. In the past month, it reaped significant gains as a result of the risk-on (search for yield) sentiment. The rand appreciated by 7.5% against the US dollar in January, recovering almost half of the 15% it had lost in 2018. The demand for EM bonds increased sharply as foreign investors searched for higher real yields. This was a key support for the currency in January. A dovish Fed saw the USD weaken sharply towards month-end, helping the rand and EM peers further.
Implications of the news
- The US Interest rates on EMs
EM/SA cyclical fortunes depend on US monetary policy, largely via three channels, that is, global interest rates, the dollar, and global output. With the Fed’s recent dovish shift, the hunt for yield is expected to be back and flows to EM are be picking up sharply. A dovish monetary policy will lead to lower interest rates (or an equivalent action) and a possible weakening of the country’s currency (as we are currently seeing in the US). Although a lower interest rate will usually weaken a currency, what also matters is the local interest rate relative to the interest rate of other countries.
- The Rand
The South African rand is one of the most heavily traded emerging market currencies in the world. This makes our currency a favourite for international currency speculators because they know that they can buy or sell out of a large position in the rand very quickly. It also means that our currency responds very sensitively and immediately to any event among the emerging market economies, even if that event has little or nothing to do with South Africa.
Considering that Foreign investors are always forward looking, the rand can be an excellent measure of our complex political and economic progress. If the rand is generally strengthening, foreign investors seem to believe that our political and economic situation is improving and vice versa. Foreign investors often do comprehensive due diligence before they invest in a country. In this regard, Cornerstone Asset Management (CSAM) has assessed the rand performance over the recent past to analyse if it was indeed indicative of what was happening in the local and global economy.
Source: Cornerstone Asset Management, https://www.resbank.co.za/Research/Rates
The graph above shows how the rand has performed against the US dollar over the past three and a half years. At the beginning of the period (July 2015), we have seen a steady rand weakness under the Zuma administration which ended after the appointment of Pravin Gordhan as Minister of Finance in January 2016. This was followed by change of sentiment towards SA and we have seen a prolonged period of rand strength (until September 2017). We have also noticed that the market friendly ANC elective conference outcome (the election of Ramaphosa as the ANC President) supported the rand. However, this positive sentiment faded away from February 2018 as concerns over land redistribution escalated. Then around mid-August 2018 we saw investor sentiment changing from “risk-on” to “risk-off” as foreign investors sought safe havens as the issues around trade wars heightened. They pulled their cash out of the rand causing it to fall unexpectedly outside its long-term strengthening trend.
Problems in Turkey and Brazil and to a lesser extent China, which really had nothing to do with South Africa, shifted perceptions of emerging economies remarkably, and the rand suffered as a result. Subsequently, we saw international investor confidence slowly returning and emerging markets once again became the high-risk, high-return preference of world investors. This pattern was strongly re-affirmed when foreign investors suddenly became aware that South Africa was actively addressing issues of corruption, state capture and policy certainty. This caused the rand to sharply retreat on 31st January 2019 from around R13.60 to the US$ to R13.32.
- The Local Markets
There is a strong relationship between global financial conditions and the performance of SA assets (bonds and equity). We expect this relationship to remain intact given SA’s well-developed/liquid capital markets which are integrated with the rest of the world. The markets (both locally and globally) are expected to have a positive 2019. This outlook comes on the back of a negative 2018 and that valuations are now looking attractive (cheap). With this in mind, we have done some analysis which shows how markets (especially risk assets i.e. equities and property) have performed following a period of poor performance. The graph below shows that SA riskier assets always rebound after a period of poor performance. Therefore, we encourage our investors not to give up on their riskier asset holdings as the markets will reward patient long-term investors.
Source: Cornerstone Asset Management; Morningstar
Markets During the Month
- Local equity market (as measured by the JSE All Share Index) extended their December gains up 2.8% in line with the rally in global markets. The financial sector supported these returns, up 6.0% for the month.
- Global equities recovered its 2018 losses in January, up 7.8% for the month.
- Listed property (SAPY) staged a comeback in January 2019, up 9.2% rising from a lower base.
Source: Cornerstone Asset Management; Morningstar
- Bond index (ALBI) ended the month up 2.9% mainly supported by the strong rand and the change of sentiment towards emerging markets.
- Cash posted a modest 0.6% for the month.
The rand was the best performing currency against the US dollar, and it ended the month stronger against all the developed market currencies, up:
- 7.8% against the US dollar
- 4.7% against the British Pound
- 7.4% against the Euro
January was a positive month across the board with global equities staging a solid recovery. The Federal Reserve left interest rates unchanged and their action was more dovish which supports EMs as investors search for real yield. Foreign investors appear to be somewhat reassured as to SA’s growth prospects. The rand was the best performing currency against the US dollar for the month. In other words, the strength of a currency is like the strength of a share which reflects the perceived financial health of the entity that it represents. A share represents a company and it will strengthen if that company is perceived to be doing well. A currency represents a country and directly reflects investor perceptions of that country’s progress. If this argument holds (other things held constant), the current rand strength would imply economic and financial markets recovery.
Reasonable steps have been taken to ensure the validity and accuracy of the information in this document. However, Cornerstone Asset Management (Pty) Ltd (CSAM) does not accept any responsibility for any claim, damages, loss or expense arising out or in connection with the information in this document. The content used in this document is sourced from various media publications, the internet and CSAM internal research. Cornerstone Asset Management is an authorized financial services provider, FSP No. 45700