This quarter we faced unanswered questions on Brexit, entered a new era of politics in the USA, and changed guard at local, municipal level. Still at home, political interference continues to play a central role. As with the great Ali vs Foreman matchup in the 70’s - Finance Minister Pravin Gordhan is taking all the hits. One can only hope that he lands a knockout punch and reaffirms South Africa’s position as a country with a solid future.
|Asset Class||Currency||1 Month||3 Month||2016 YTD|
|Emerging Market Equities||USD||1.29%||9.03%||16.02%|
Local equities remained flat over the quarter with property being the only sector with negative returns. The Rand has continued its strength - up 6% against the dollar. Currently local equities tend to do better when the Rand is weak. Rand-hedge shares like Naspers, Billiton and Richemont make up more than 30% of the index. Local bonds have made a remarkable comeback since the Nene debacle in December and are up 15% in 2016.
Brexit weakened the pound considerably. It’s clear that there is a lot of uncertainty as to how Britain will approach the exit - and when they will trigger Article 50 of the Lisbon Treaty that solidifies this intention to withdraw from the EU. Theresa May has replaced David Cameron as PM and her main focus is on preserving the UK economy through this turbulent economic stage.
Emerging market equities have remained in favour this year after their three-year dip. With South African equity outperforming the emerging market index (in dollar terms), one can only dream about the returns we could see without a Zupta state. With another postponement of a US interest rate hike and subdued interest rates in the rest of the developed world, inflows to emerging markets could continue as investors are seeking greater yields. Many of the emerging markets have also made progress with their economic policies.
Fundamentally, South Africa remains in a low growth environment. The graph above illustrates the structural decline in the South African Gross Domestic Product (GDP) growth over the past few years. It is hard to see a significant change to the growth outlook given that business confidence is at a 30 year low. However, second quarter growth of 3.3% year-on-year surprised – a cyclical uptick is possible. One positive development has been that inflation has retreated. Inflation has normalized at about 6%, which indicates that we are nearing the end of the hiking cycle in interest rates (if not already at the end).
Finance Minister Gordhan was summoned to court in early October for alleged fraud relating to his time at SARS. The mini budget that will be delivered at the end of October will be crucial. We can only hope that sanity prevails and that he will be able to deliver this speech. If not, we will almost certainly head for a ratings downgrade.
This will show whether fiscal spending has been tightened and will be significant to the rating agencies.
The current political environment creates unusual uncertainty. A leadership vacuum seems to have been replaced with intent by the Zuptas to usurp Treasury and economic policy. It seems to have torn the ruling party into many different factions. Recently, increasingly strong opposition to President Zuma’s leadership has replaced the familiar silence from within the party. Without policy certainty, there is an unstable environment for business and the financial markets to operate in.
On the other side of the pond we have a presidential race worth watching – one that could also have serious economic consequences. Analysts are pointing to a comfortable victory for Clinton and the Democratic Party. Clinton is not expected to rock the boat. Should Trump be elected it could send shockwaves through the markets and could create similar policy uncertainty. Interestingly, both candidates have recognised the need for fixed investment spending - a crucial element to sustained economic growth in the USA.
We have alerted our clients for some time that below-average returns could be expected. It is never easy when it happens.
For a long period, investors experienced unsustainable, above-average returns. In a way, we were borrowing from the future. We are now repaying those returns with below-average returns. We do not know when returns will normalise, but recommend that our clients remain committed to their long-term plans, precisely because we cannot predict the turnaround.
The temptation is there to “do something”. This is hardly ever the right strategy. We still believe that a long-term view is more beneficial to you than short-term interventions to try to anticipate the outcome of certain events.
We leave you with the famous saying from Mark Twain on market timing: “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”