ECONOMIC AND MARKET OVERVIEW
Global
Global economic growth continued its slowdown in October. However, continued monetary policy easing in the United States, coupled with less noise around global trade wars, has led global equity markets higher during the month.
Reduced chances of a “no-deal” Brexit also played its part in improving investor sentiment as Prime Minister Boris Johnson seems to have negotiated most of the many hurdles to an orderly exit from the European Union. A “no-deal” withdrawal is not completely ruled out, however, as the newly elected parliament (following the 12 December elections) will still have to pass a new version of the Withdrawal Agreement Bill before the 31st of January 2020. On the back of these developments, Pound Sterling strengthened more than 5% against the greenback in October.
The US central bank has cut interest rates for the third time this year in an attempt to keep the longest running period of growth in the country’s history continuing into the crucial election year of 2020. In a statement explaining the decision, chairman Jerome Powel said unemployment had remained low and household spending had been growing strongly, but
business investment and exports had remained weak. Inflation was below its 2% target. The Federal Reserve put itself on a potential collision course with Donald Trump when it signalled to the financial markets that it had no immediate intention of cutting the cost of borrowing further. Trump has put intense pressure on the Fed to boost the world’s biggest economy and his own re-election prospects by making aggressive cuts in the cost of borrowing. Powell, however, said there was a limit to what the Fed could do and that a more effective way to stimulate activity would be for Congress to loosen fiscal policy through spending increases or tax cuts.
The New York Times reported that China’s economic slowdown worsened in the July to September period as the trade war with the United States, along other problems, leave Beijing struggling to meet its goals. The figures show China continues to grow at its slowest pace in nearly three decades of modern record-keeping. While China is still expanding faster than any other major economy, the latest data suggests that the pace could come in at the low end of Beijing’s official target, which could add to worries about broader prospects for
global growth. China’s efforts to tame its addiction to lending and the deepening impact of the trade war have been major drags on the economy. Other problems are worsening as the country’s vast automotive sector shrinks, its real estate sector levels off and as its pigs die in vast numbers from a swine fever epidemic. China’s economic output grew 6 percent in the third quarter compared with a year earlier. This is at the bottom end of Beijing’s full-year target of 6 percent to 6.5 percent.
According to a recent report from Macro Research Board even moderate economic growth in
2020 would provide support for global equities and other growth assets and push bond yields at least modestly higher. On the positive side, Europe has the potential to surprise on the upside. The next six to twelve months are likely to remain volatile on the back of US election campaigning, developments around Brexit and the state of various conflicts in the Middle East, but there is not enough evidence to reduce exposure to growth assets yet.
South Africa
Against a backdrop of a sobering medium term budget policy statement (MTBPS) and a deterioration of Moody’s outlook to negative, the Springboks did their best to change investor confidence by lifting the Webb Ellis cup in Yokohama on 2 November.
Captain Siya Kolisi’s remarkable journey from a dusty, poverty-stricken township on the eastern coast of South Africa to World Cup-winning captain, added gravitas to the occasion. He finished his post-match interview with these poignant words: “…we can achieve anything if we work together as one.”
This is, indeed, what is required to address the realistic, but taxing picture painted by finance minister, Tito Mboweni, when he delivered the Medium-Term Budget Policy Statement (MTBPS) on 31 October. According to Stanlib Asset Management, it attracted more attention than any other delivered, since 1997, due to the intense pressures now evident on government finances. The minister presented a sobering update of SA’s fiscal parameters, with clear evidence of a further sharp deterioration in government’s fiscal position. The weak economic environment, a further revenue shortfall and the additional funding requirements by state-owned enterprises (SOEs) meant that National Treasury was always going to have to report further fiscal slippage. However, the extent of slippage announced by Minister Mboweni exceeded most analysts’ expectations. Unsurprisingly, the rand weakened, and bond yields rose.
Ultimately, there is no substitute for higher economic growth in resolving South Africa’s unfolding fiscal crisis. Furthermore (and this is where Captain Kolisi’s words ring particularly true), this can only be achieved through a concerted and coordinated effort to lift business and household confidence to improve private sector fixed investment, skills development and productivity.
Against this fiscal and economic backdrop, it’s not surprising that valuations of “SA Inc” companies are at multi-year lows. Conventional wisdom dictates that the bad news is priced in and any surprise, however moderate in nature, could lead to significant returns from investments in locally-focused companies.
The South African Reserve Bank’s monetary policy committee (MPC) left interest rates unchanged during their September meeting. Governor Lesetja Kganyago announced that “…monetary policy actions will continue to focus on anchoring inflation expectations near the mid-point (4.5%) of the inflation target range in the interest of balanced and sustainable growth. In this persistently uncertain environment, future policy decisions will continue to be highly data-dependent, sensitive to the assessment of the balance of risks to the outlook and will seek to look-through temporary price shocks.” Expectations for an interest rate cut during the November meeting have now declined with many analysts expecting the next move only in 2020. It seems increasingly likely that it’s fiscal policy and a turnaround in consumer and business confidence, rather than monetary intervention, will be the catalyst for a resurgence in South Africa’s growth prospects.
