First quarter 2019 – is the market telling us something (and are we listening)?

Markets are geared towards being forward-focused, in that prices today should provide an indication of expected value in the future. Since any prediction involves at least some speculation, the degree of certainty or uncertainty of the prediction typically reflects how much risk is involved.

The first quarter of 2019 richly rewarded investors, with all strategies returning strong positive performance. Equity markets – both our own JSE and global indices – generated returns of near-double digits during the first three months of the year. This reversed 2018’s negative and somewhat choppy direction, providing welcome compensation for those investors who held their positions through the difficult periods. These returns pointed to just how undervalued markets were by the end of 2018.

As advisors, it is our role to dissect developments in the world around us, and construct an appropriate mix of assets to both minimise the risk of underperforming investments as well as capture as much upside performance as possible.

As the rhetoric and tone escalate in the run-up to the national elections on 8 May 2018, it is difficult to not feel swamped by emotive billboards and headlines, all hoping to grab our attention and swing our precious votes in their favour. But with all this ‘noise’ around us, what are these forward-looking markets telling us about the future?

Well, without making a call on the outcome of the elections, we can observe a few key trends that are impacting investments:

  1. The cost of borrowing

During the course of 2018, the US Federal Reserve raised US interest rates four times. In December’s Federal Open Market Committee meeting, chairman Jerome Powell hinted that rates would likely stay on hold at these levels, “at least for now”. Stable interest rates, both locally and globally, relieves pressure on economies, creating an environment that is more conducive to growth.

While the developed world’s rates remain below those one would regard as ‘normal’, the pressures to raise rates in economies like the US and the Eurozone remain low. By extension, this relieves pressure on our own SARB, and as a result economists do not expect our rates to rise in the near-term.  This environment accommodates growth, and continued support for equity and bond markets.

  1. Global growth

Global GDP growth has been the focus of many news reports.  While the rate of growth itself has slowed marginally, growth has remained close to trend levels. The central players in this are still the US and China and their ongoing trade tariff negotiations.

While the US-Sino talks continue, sentiments that they are in the last mile of the marathon and near resolution, are being watched closely. The US and China are the two biggest economies in the world – recent International Monetary Fund (IMF) statistics revealed their combined economies accounted for almost 30% of global GDP! Any policy that aims to regulate or slow their mutual share of global trade and by extension, slow either economy’s GDP growth, will have an impact on the rest of the world too. The old adage, ‘If the United States sneezes, the rest of the world catches a cold’ might well soon be amended to include China too.

We have long believed that the tariffs imposed on Chinese goods imported into and sold in the US are not actually about trade, but global supremacy. Trade tariffs, in theory, make US-made products cheaper than imported ones, and encourage consumers to buy American products, thus strengthening the US economy. This scenario strengthens US President Donald Trump’s position, bolstering his chances for re-election.

  1. Is local still lekker?

President Ramaphosa assumed the role of State President on 15 February 2018 after former President, Jacob Zuma, was pushed to resign before the end of his term. Amidst fanfare and great expectation of clean governance and a turnaround of our economy, our currency strengthened and our bond market rallied to multi-year highs. Only for reality to bite – and bite hard it certainly did! Because in the middle of a global economy riddled with uncertainty, our economy failed to break out of the malaise of the Zuma years and into the ‘new dawn’.

With the South African economy still failing to show any meaningful growth, the sentiment on Main Street is that we’re doomed to failure and demise. Despite this, the affirmed stable outlooks from both Moody’s and S&P Global on our credit ratings this month indicate that their expectations for our economy differ somewhat from that of many South Africans.

As we enter the final stretch before South Africa votes on who will lead our Beloved Country for the next five years, it is imperative to look through the noise and dissect the real factors influencing your wealth. While no one rings a bell at the bottom of the market, the last quarter’s returns, along with the affirmations of two of the world’s most influential ratings groups, have certainly provided food for thought – that the market might just be telling a story that is worth sitting up and listening to.