OPINION: Financial markets remain bullish in new year

Published Jan 20, 2020

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JOHANNESBURG - Global and local financial markets have taken off from where they ended 2019 and remain strong.

More optimism around subsiding world risks prevailed after US President Donald Trump’s speech explaining the US confrontation with Iran and the seemingly subdued retaliation by Iran after the blunder around the shooting down of the Ukraine plane by the Iranian forces.

This was followed by the signing of the first-round trade pact between the US and China last week and more positive sentiment that the Brexit deal will lead to a more stabilised Europe, with higher expected growth.

The news last Thursday that the Chinese recorded a slower growth rate of 6percent during the fourth quarter of 2019 and 6.1percent for the year as a whole was as expected, with optimism of a recovery, given signs of an end of the trade war, that the Chinese economy will lift its growth in 2020.

Strong increases in investment expenditure the previous quarter ignited the positive sentiment.

In reaction to these changes in the global-political climate, equity prices around the world moved stronger and on Wall Street, the Dow Jones industrial index, S&P 500 and Nasdaq indices showed record levels over the last seven trading days. These indices not only had their best returns in 10 years in 2019, but already had gained 2.9percent (Dow Jones), 2.7percent (S&P 500) and 4.5percent (Nasdaq) since the beginning of the year.

Despite the general feeling among analysts that it was too much too quickly, prospects in the US remain bullish as the first two companies to release results last week recorded higher than expected earnings.

It is forecast that the US economy, expenditure and investments will remain healthy in 2020 and that a big turnaround in share prices was unlikely.

Locally, the all share index ended 2019 on 27084 points, with total returns up by 11.1percent for the year.

The New Year started with the uncertainties around the global and domestic geo-political risk factors still hanging as a dark cloud over the country.

Eskom yet again had to introduce load shedding that led to the resignation of the board chairperson Jabu Mabuza.

Calls from some quarters for the Minister of Public Enterprises, Pravin Gordhan, to be replaced, also contributed to negative domestic sentiment.

Despite these negative sentiments evidence emerged that the South African economy might after all experience a more stable economic environment in 2020.

Although both the SA Reserve Bank (Sarb) (1.1percent) and the World Bank (0.9percent) downscaled the economic outlook for 2020, the increase in business confidence according to the South African Chamber of Commerce and Industry business index and strong recovery in retail sales (2.9percent) in November are silent evidence towards some recovery.

This was followed last week by the surprise decrease in the repo rate of 0.25basis points to 6.25percent by the monetary policy committee.

The inflation expectation model of the Reserve Bank forecast a much lower inflation rate of 4.2percent in 2019, 4.9percent in 2020 and 4.6percent in 2021 than at the previous meeting in November 2019.

The governor of Sarb, Lesetja Kganyago, stressed that the central bank would act accordingly if the country was downgraded to junk status during the year.

In reaction to the subsiding of global geopolitical risks, and more optimism around an economic recovery locally, share markets moved strongly since the beginning of the year, while the rand and bond rates remained stable on the strong side.

The all share index ended Friday on 59001 points.

This was 1917 points, or 3.4percent higher than at the end of 2019. Last week alone the broader index gained 2.64percent.

The big winner last week indeed was industrial stocks as the IN25 index shot up by 4.3percent.

The news of the signing of the deal of the first round of trade negotiations between the US and China helped the resources sector as the Resources 10 Index traded 2.7percent higher.

The price of platinum had gained more than $50 (R722) to $1018 on Friday afternoon.

The somewhat weaker rand contributed to the financial and property indices to move sideways.

Despite the worries around power utility Eskom and the cut of the repo rate by the monetary policy committee, the rand traded in a narrow and stable band last week.

The currency lost 1percent against the dollar at R14.43 at 5pm on Friday.

Dr Chris Harmse: Economist and chief investment officer.

BUSINESS REPORT 

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