ECONOMIC AND MARKET OVERVIEW
Global
January saw the world’s political and business leaders convene in the Swiss town of Davos under the banner of the World Economic Forum (WEF). The theme of the 2020 meeting was “Stakeholders for a Cohesive and Sustainable World”, and even attracted US President Donald Trump.
It was not only his opinions expressed at the WEF that made headlines though. President Trump authorized a drone strike near the Baghdad International Airport which targeted and killed Iranian major general Qasem Soleimani of the Islamic Revolutionary Guard Corps. He also signed a trade agreement between the United States and China, and is the subject of an impeachment trial back home. There is no doubt that the run-up to the US Presidential election will contain a lot of fireworks that may drive short-term sentiment in markets.
On a more fundamental level the International Monetary Fund’s latest World Economic Outlook (published in January 2020) expects global economic growth to be around 3.3% per annum in 2020 and 2021, respectively. This report was published before the coronavirus outbreak in China and actual growth could end up being somewhat lower if the illness turns into a pandemic.
The growth rate has been revised downward from their October 2019 report and reflects negative surprises to economic activity in a few emerging market economies, notably India, which led to a reassessment of growth prospects over the next two years. In a few cases, this reassessment also reflects the impact of increased social unrest. On the positive side, market sentiment has been boosted by tentative signs that manufacturing activity and global trade are bottoming out, a broad-based shift toward accommodative monetary policy, intermittent favorable news on US-China trade negotiations, and the (at least theoretical) conclusion of Brexit, leading to some retreat from the risk-off environment that had set in a few months ago.
Against this backdrop, a recent report from Macro Research Board Global notes that economic activity is slowly firming, but is not likely to be sufficiently strong as to unnerve government bond markets over the next few months. They expect that a calm bond market, in turn, will be supportive of equity and credit markets, although some markets and sectors
are probably becoming too aggressive in terms of discounting the coming upturn in corporate profits. Nevertheless, the macro backdrop is sufficiently positive, and likely to remain so, to suggest that no worse than a digestion phase or mild correction will be necessary to better align equity prices with the slow-moving uptrend in earnings.
The current market cycle (which started in 2009 at the bottom of the Global Financial Crisis) is now the longest on (modern) record. It’s important to note, though, that cycles don’t die of old age, but of a significant change in economic fundamentals. The latter has not transpired (yet). Add to that that one “should not fight the Fed(eral Reserve Bank)” and global developed markets could continue to be led by market performance in the United States.
South Africa
The South African Reserve Bank’s Monetary Policy Committee’s (MPC) first meeting for 2020 brought some relief to the South African consumer when Governor Lesetja Kganyago announced a reduction of 0.25% in the repurchase rate.
This decision was reached in a unanimous vote. Their Quarterly Projection Model (QPM) indicates another rate cut of 0.25% in the fourth quarter of 2020, but many economists are calling for much deeper and earlier cuts in order to kickstart South Africa’s ailing economy.
In his statement the governor notes that the outlook for the local economy remains fragile and business confidence remains weak. Inflation is under control by most measures so it should not be a cause for concern when further rate cuts are considered. The MPC assesses the risks to economic growth to be to the downside. Escalation in global trade tensions, geo-political risks, further domestic supply constraints and/or sustained higher oil prices could generate headwinds to growth. They further stated that public sector financing needs have risen, thereby increasing risk premiums and pushing borrowing costs for the broader economy higher. Implementation of prudent macroeconomic policies and structural reforms that lower costs and increase investment, potential growth and job creation, remains urgent.
The headline consumer price index (CPI) increased from a year on year rate of 3.6% in November to 4.0% in December to record the lowest average calendar year inflation since 2005. The somewhat higher inflation was a result of the faster increase in the prices of transport and food. Nevertheless, inflation is expected to increase going into
2020 due to higher food and energy prices. While weak demand should result in a shallow inflation upcycle, key risks are a drought-induced food price increase, higher electricity prices and a weaker rand.
Local economic data releases continue to point to a weak economy that is teetering on the brink of a recession. Whether the economy grew just over or under zero during the last quarter of 2019 will determine whether it is in a technical recession or not. Whatever the outcome, growth is low with an unlikely meaningful recovery in 2020. With much of the bad news seemingly priced into companies with a South African focus, any positive surprise should reward investors exposed to these shares.
