Monthly Market Update

Monthly Market Update

– Rich Mashayanyika, Director Cornerstone Asset Management

After what was considered a solid performance in January, the local markets (JSE All Share) showed no intention of slowing down and performed even better in February. This positive performance could be attributed to the favourable developments in the trade negotiations between China and America as well as the dovish sentiment echoed by most central banks. The indefinite postponement of tariff increases on Chinese imports by President Donald Trump indicates a lower risk of tariffs being applied. 1

The US Federal Bank also indicated that they might take a more patient approach in the interest rate hikes, taking into account the effect it can have on global economic growth and the unpredictability of financial markets. 1

Locally, on 20 February, the Finance Mister Tito Mboweni delivered his maiden Budget Speech. CSAM agrees with Isaah Mhlanga, Executive Chief Economist at Alexander Forbes, who viewed the speech as “a structural reform budget which aims to reduce the immediate fiscal and economic risks posed by Eskom and other State-Owned Enterprises (SOEs) as reviewed by their unsustainable and weak balance sheets and operational models.”2  This followed the unbundling suggestions which the President highlighted in his State of the Nation Address (SONA) delivered earlier during the same month.

In the 2019 Budget Speech, the National Treasury also revised its real GDP growth forecast to 1.5% from 1.7% for 2019. While growth is expected to recover to 2.1% by 2021, the risk of this not materialising is high if fiscal discipline is not maintained. We anticipate similar downward revisions to the SARB’s own growth estimates later this month.

Implications of the news

  • The Budget

The budget was dominated by Eskom`s needs. With government finances already stretched, the only way to bail Eskom out means the government will have to increase borrowing. This is expected to result in the government debt to GDP to rise over 60% by 2022. The international standards for government debt is around 60% maximum, with any level above that is considered to be risky.

Unlike China or India with growth above 6%, higher debt levels in these countries will be used to finance economic growth and therefore the debt will be self-financing. Considering the lower growth rates in South Africa, increasing debt to fund inefficient, loss-making SOEs, will drag down our economy even further. Echoing a recent article in Global Finance, it’s important to note that while debt can generate future growth, fiscal discipline is crucial. Having higher debt levels entails that at some point the default point will be reached—not considering that even when default is avoided, the cumulative cost of financing debt becomes an unaffordable burden over the shoulders of future generations. 4 In this regard, CSAM subscribes to the idea that the government should not continue to support these SOEs.

Despite more emphasis on Eskom, some other key issues of the budget included the following:

  1. Achieving a higher rate of economic growth
  2. Increasing tax collection
  3. Reasonable, affordable expenditure
  4. Stabilising and reducing debt
  5. Reconfiguring state-owned enterprises
  6. Managing the public sector wage bill
  • The Local Market

The Equity market continued to rebound, gaining 3.4% in February, rewarding our most prudent and patient investors who had the courage to maintain the course. Year to date, the market as measured by the JSE All Share index, is up over 6% and over 10% if we stretch the start date to the beginning of the recovery in December 2018. While we cannot extrapolate this spectacular return trend of the past three months, it is worth noting that, if you would have switched out of your growth assets to cash, you would have missed the over 10% recovery in these three months.

Therefore, one of the most renowned Investment professionals, Warren Buffet once said: “The stock market is a device for transferring money from the impatient to the patient.”

 Source: Cornerstone Asset Management; Morningstar

We always encourage and remind our clients that short-term price fluctuations do not affect the long-term value of their wealth. Below, we present a graph which shows how markets have performed in 2018 compared to the 10-year period between 2009 to end of February 2019.

 Source: Cornerstone Asset Management; Morningstar

While one calendar year performance might have influenced some investors to change their financial plans and objectives, the long-term performance graph below shows that growth assets would have materially outperformed cash and bonds over a 10-year period. The graph and the table below show that local equities, as measured by the JSE All Share, had delivered 15% per annum over the past 10 years, outperforming cash and bonds by 8.4% and 6.6% respectively.

 Source: Cornerstone Asset Management; Morningstar

 Markets During the Month

  • Local equity market (as measured by the JSE All Share Index) extended their January gains, up 3.4%, in line with the rally in global markets. The resource sector supported these returns, up 8.0% for the month.
  • Global equities continued the positive trend, up 9.1% for the month.
  • Listed property (SAPY) declined 5.7% as the sector continue to face headwinds of lower distribution growth on the back of poor economic conditions locally, over supply of space and increasing vacant spaces especially in office and retail sectors. A weaker Rand and rising bond yields also had a negative impact on the property sector.

 Source: Cornerstone Asset Management; Morningstar

  • Bond index (ALBI) ended the month down 0.4% mainly as a result of a weaker rand.
  • Cash posted a modest 0.5% for the month.

The rand was amongst the worst currencies against the US dollar, and it ended the month weaker against all the developed market currencies, down:

  • 6.0% against the US dollar
  • 7.1% against the British Pound
  • 5.1% against the Euro

In February, the rand depreciated against all major currencies, negating most of the progress made in January. Eskom re-implementing load shedding, an unimpressive fiscal trajectory and the broad-based sell-off in EM currencies in the past month, all contributed to the rand’s weak performance. Globally, the rand was among the top three worst performing currencies taking second place after the Argentine peso and followed closely by the Brazilian real.5  

In summary

Equity markets across the board continued the positive trending, up over 6% YTD. Considering the 2018 performance for this asset class, the YTD performance reaffirms our view that, when markets recover, it recovers amid fears among investors. Looking forward, valuations look decent considering a low inflation environment with little pressure on short term rates to move higher both locally or globally.  That said, all eyes will be on the upcoming Moody’s announcement regarding South African’s sovereign rating.  Questions remain around their assessment of the government’s plan to ensure financial stability from embattled SOE’s, especially Eskom. While CSAM and many other investment professionals do not expect any changes on SA`s rating, a potential downgrade could put significant pressure on the Rand and the domestic bond market.

While our economy seems to be struggling, one should also keep in mind that a decision to invest in the South African market does not necessarily mean that the portfolio will only be exposed to the local economy.  It is important to note that a significant proportion of the earnings of many JSE-listed companies are generated internationally.

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

1.Alexander Forbes Investments monthly markets update February 2019

2.https://www.fin24.com/Budget/budget2019-alexander-forbes-hails-tough-but-realistic-mboweni-20190220

3.https://www.gov.za/speeches/budget_vote

4.https://www.gfmag.com/global-data/economic-data/public-debt-percentage-gdp

5.http://blog.nedbankcib.co.za/2019/03/monthly-insights-march-2019/

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