ECONOMIC AND MARKET OVERVIEW
Global
The latest World Economic Outlook (published by the International Monetary Fund) reports that, after slowing sharply in the last three quarters of 2018, the pace of global economic activity remains weak. Momentum in manufacturing activity, in particular, has weakened substantially to levels not seen since the global financial crisis. Rising trade and geopolitical tensions have increased uncertainty about the future of the global trading system and international cooperation more generally, taking a toll on business confidence, investment decisions, and global trade.
A notable shift toward increased monetary policy accommodation – through both action and communication – has cushioned the impact of these tensions on financial market sentiment and activity, while a generally resilient service sector has supported employment growth. That said, the outlook remains precarious.
Global economic growth is forecast at 3 percent for 2019, its lowest level since 2008–09 and a 0.3 percentage point downgrade from the April 2019 World Economic Outlook. Growth is projected to pick up to 3.4 percent in 2020, reflecting primarily a projected improvement in economic performance in a number of emerging markets in Latin America, the Middle East, and emerging and developing Europe that are under macroeconomic strain. Yet, with uncertainty about prospects for several of these countries, a projected slowdown in China and the United States, and prominent downside risks, a much more subdued pace of global activity could well materialise.
Having said that, the resilience of the consumer sector bodes well for the economic outlook of the United States. In a recent global macro strategy report, MRB Partners expects the downturn in manufacturing to gradually unwind. This should be supportive of investment returns in global growth assets (equities and property) over the medium term. Current dividend yields on equities remain compelling compared with the extraordinarily low yields available on long-term government bonds. Based on MRB’s most recent analysis, returns
from dividends for most markets will exceed those from bonds, and will provide the majority
of total equity returns over the next decade. Dividends can provide little immediate protection for equities in an economic recession and bear market, but even under conservative growth assumptions, they will provide a solid safety valve for equities over the long haul.
From a pure valuation point of view, emerging market equities look particularly attractive. Concerns about the US-China tariff war, however, seem to hinder an unlocking of this value and it’s unlikely that emerging markets will outperform their developed peers before uncertainty about a possible trade deal subsides. Patient investors would, however, do well to consider their investment options in emerging markets as current levels provide a very attractive entry point. Discerning allocations to equities and bonds in developing markets may yet prove to have been a smart move when assessed at the end of the next decade.
South Africa
November’s news flow around South Africa did little to improve investor confidence. Ratings agency Moody’s downgraded the South African sovereign outlook to negative, following the reality check of the medium term budget policy statement (MTBPS) in October.
Tantalum Capital further reports that the strike at South African Airways and the appointment of Eskom’s new group chief executive, kept the perilous state of South Africa’s state owned enterprises on the front page. On the bright side, the supportive global risk-on backdrop helped to support the Rand, which traded stronger despite the deteriorating sovereign debt outlook.
The South African bond market remains uneasy about the fragile fiscal outlook, as yields rose towards the end of November. Inflation (3.7% year on year) continued to surprise on the downside, but the South African Reserve Bank’s Monetary Policy Committee (MPC) kept rates unchanged at their November meeting. It was not a unanimous decision though, with two of the five votes opting for a 25 basis point cut in rates. The MPC assesses the risks to the growth forecast 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. Public sector financing needs have risen, raising the prospect of further pressure on the currency 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 question remains whether the governing party will have the political will to implement these much needed structural reforms and risk alienating themselves from their labour union support base.
Sustained low inflation, high real interest rates and a return of global appetite for yield may support both the local bond and equity market through the next 12 to 18 months. A further sovereign credit downgrade may turn out to be a fleeting dampener to a proper bull market, but should not have a lasting effect as it already seems to be priced in.
