Monthly Market Update

– Rich Mashayanyika, Director Cornerstone Asset Management

Worries about global growth, the prolonged trade war, geopolitical tensions, and local muted economic growth continue to weigh on financial markets’ performance, with the JSE only finding some reprieve (up 0.2%) in September following two consecutive months of losses. The US Federal Open Market Committee lowered the target range for the federal funds rate to 1.75% – 2.0% range from 2.0% – 2.25% which was in line with market expectations[1]. However, the Fed`s failure to give an indication of further US rate cuts resulted in the rand making little traction.

On the positive side, local inflation is likely to remain contained over the medium term, with additional repo rate cuts having the potential to lower financing costs further. However, in the current environment of policy uncertainty, political instability and rising socio-economic discontent, businesses are reluctant to start new investments, even though financing costs have decreased. The economic policy certainty, political and socio-economic risks continue to outweigh the positive effect of lower financing costs.

For South Africa specifically, the Medium-Term Budget Policy Statement (MTBPS) towards end of October remains a key policy event, while a Moody’s sovereign credit rating review is scheduled for 1 November. The MTBPS is crucial in a number of areas. These areas include debt to GDP projections, indications on future taxation and spending, particularly support for SOEs. Tax buoyancy is sagging along with GDP growth, and public sector funds squandered through corruption, which is yet to be recouped, all of which is also quelling business sentiment.[2] If no significant progress has been made with re-organising and rationalizing SOEs like Eskom, then the international ratings agency Moodys could decide to reduce the outlook for the country to “negative” from “stable”. That would further depress the rand.

Implications of the news

  • Geopolitical Events

The Fed has cut rates again by a further 0,25% which shows that it is still worried about the possibility of an economic recession.  On the other hand, Europe has resumed its quantitative easing program also for the same reason. Added to this has been a general swing towards “risk-off” as Donald Trump engaged the Chinese and other nations in a trade war. His actions have had a negative impact on emerging economies and threaten to derail the general recovery of the world economy[3]. A further negative is the impending impeachment proceedings against Trump. All this has weighed on the rand performance which has lost ground materially since February 2018.

                                                                                                                                             Source: Cornerstone Asset Management; www.resbank.co.za

  • Local muted economic growth

On the local front, the realities of fixing our economy and particularly Eskom have become increasingly apparent. Even with the President`s drive to improve the level of corruption, the sheer cost of the nine years of Zuma’s presidency is daunting. The weakening of the rand to above R15 to the US dollar must be seen as significant. It has a direct impact on the South African business confidence and inflation rate through the petrol price and may delay the further decline of interest rates this year.[4]  A rate cut is expected to stimulate the fragile economy, consumer and business confidence by loosening the cost of debt.

  • Risk-off Sentiment

A risk-off event like  trade war tensions between China and the United States and concerns that the Fed might not cut interest rates as much as previously expected, possible no deal Brexit and possible impeachment of the US President, emerging markets will usually be at the receiving end as investors flock back to safe havens. These events have dominated markets for a while now, resulting in emerging markets (South Africa included) on the backfoot. The graph below shows year to date local market performance compared to developed markets (MSCI World) and other emerging markets (MSCI EM).

                                                                                                                                                    Source: Cornerstone Asset Management; Morningstar

Markets During the Month

  • Local equity market (as measured by the JSE All Share Index) had some reprieve in September 2019, up 0.2% following two months of consistent
  • Global equities were up 2.1% for the month, responding to the positive news of stimulus measures by global central banks
  • Listed property (SAPY) was 0.3% up for the month and only 1.3% up year to date as subdued distribution growth, oversupply, low demand and slow economic growth continue to be the headwinds in the sector.
  • Bond index (ALBI) ended the month up 0,5%, and 8.4% year to date, making it the best local asset class over the past three quarters of 2019.
  • Cash posted a modest +0.6% for the month.

Source: Cornerstone Asset Management; Morningstar

The rand strengthened slightly against the Euro, up 0.4%, weakened slightly against the dollar, down 0.2%, and 1.4% down against the pound as the GBP strengthened marginally. The rand`s mixed performance was on the back of the Fed`s failure to give an indication of further US rate cuts, geopolitical risks and the never-ending trade war issues.

In summary

The news of a possible global economic slowdown, trade wars, and local muted economic growth continue to depress the local market performance resulting in the JSE trailing both the EM and global markets indexes YTD. The upcoming Medium-Term Budget Policy Statement (MTBPS) towards end of October remains a key policy event, while a Moody’s sovereign credit rating review is scheduled for 1 November. We expect The MTBPS to give a clear indication on the debt to GDP projections, indications on future taxation and spending and how the public sector funds squandered through corruption have yet to be recovered. Clarity on these issues is expected to have a positive impact on business confidence which might result in new investment flows which is exactly what we need for economic recovery.

[1] https://www.investec.com/en_za/focus/economy/sa-economics.html

[2] https://www.nedbank.co.za/content/dam/nedbank-crp/reports/MonthyInsights/2019/MonthlyInsights_190903.pdf

[3] https://www.pdsnet.co.za/index.php/the-confidential-report-october-2019/

[4]  https://www.pdsnet.co.za/index.php/the-confidential-report-october-2019/

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