There are many concerns swirling around South African investors at the moment, making it a particularly tricky time to establish a level of strategy conviction.
Major geopolitical events could have any number of outcomes and in South Africa (SA), pervasive uncertainty seems to be the watchword as we inch towards elections in May.
United States President, Donald Trump has unique a governing style: announce with a bang issues of concern to him, negotiate, achieve something relatively minor and then proclaim victory for the United States (US).
It feels like the trade dispute with China is going down a similar path. Unfortunately, we don’t believe that the greater conflict between these two major economies will disappear any time soon. Some sort of symbolic deal will likely be announced but markets will need something far more substantial to sustain the recent rally and convince investors the ‘trade war’ is over.
United States growth
United States growth was the bright spot in 2018, driven in part by the fiscal stimulus package. But in December 2018, tighter financial conditions have spooked the market and equities sold off hard. This caused the Federal Reserve Bank to make an abrupt u-turn with regards to their expected monetary policy path.
The Federal Reserve has clearly indicated that they can afford to be more patient before raising rates again, as long as inflation behaves, as we believe it will. We believe that the Federal reserve will not hike the economy into a recession and that US growth (expected at 2.2% this year and just under 2% next year) will merely slow back to potential as the tailwind of the fiscal stimulus disappears.
Chinese growth hit a soft patch in the second half of 2018 and authorities have tried their best to stimulate growth again by cutting rates, easing credit measures and announcing fiscal measures to boost growth.
These measures are starting to have an impact and its growth rate is stabilising. Unfortunately, credit levels in China are high and support from spending will be very limited. We expect growth to slow to 6% over the next two years.
Brexit/European Union impact
We do not have a strong conviction on the outcome of Brexit, but odds of a no–deal remain low.
Of greater concern now is growth in Germany, Italy and the rest of Europe. We need to see growth in Europe recover soon, otherwise emerging markets might hit another wobble as they did in March last year.
The sweet spot for emerging markets is when global growth is relatively strong. If, like last year growth in the US is strong but the rest of the world slows, the US dollar will strengthen, and emerging market currencies will sell-off.
South African elections
There is a general perception that President Cyril Ramaphosa needs to win by a convincing majority to enforce and implement the structural changes that he is proposing.
We believe that he will gain enough support to go down the reform path. Eskom remains the elephant in the room and the recent National Budget clearly indicated that it’s too big to fail and a lot of capital is committed to ‘fix’ this State-Owned Enterprise (SEO). Other SEOs are also likely to need further funding.
South Africa’s sovereign rating
Of the three recognised rating agencies, only Moody’s, still has South Africa on an investment grade rating.
The risk of falling to non-investment grade is climbing as we constantly miss our gross domestic product forecasts to the downside, thereby weakening our debt metrics. The next rating update from Moody’s will be on 29 March.
There is a fair chance of them changing our current rating outlook of stable to negative. Although this is not a downgrade per se, it is the next step towards a downgrade.
Markets are likely to remain volatile and unpredictable as the above events unfold.
We therefore recommend a well-diversified portfolio that can handle short term shocks and remind investors that staying invested is paramount for longer term gains.