While last year was good to investors in the South African and global equity markets and was marked by a low level of volatility, this year has, so far, proved a much more bumpy ride.
If you have money invested offshore, you have probably been hit by a double whammy: the pull-back in the markets, coupled with a stronger rand as a result of South Africa’s political turn-around. Together, these developments could have reduced the rand value of your investments by 20% or more.
Investors in the local equity market have also generally seen a decline in the value of their investments over the quarter, with the FTSE/JSE All Share Index down almost 6% to March 31.
A range of factors has tended to pull the global market in different directions. They are:
• Strong growth globally in company earnings;
• Market exuberance (and complacency), resulting in shares becoming overvalued;
• The tightening of monetary policy by central banks, including the upping of interest rates; and
• Geo-political issues, including the spectre of a trade war between the US and China, and increased tensions between Russia and the West.
Rob Price, the head of asset allocations at Alexander Forbes Investments, sums up the situation as follows: “We have continued to witness a heightened degree of nervousness in global financial markets over recent weeks, with equity markets struggling to maintain the robust positive momentum of 2016 and 2017.
“The rand, although pretty stable, has weakened slightly as the US dollar has recovered and risk appetite waned. The key drivers of the nervousness are: central bank monetary tightening, rising interest rates, elevated asset class valuations and late-cycle dynamics.”
Something that confirms these themes, Price says, is the degree to which global economic growth has started underperforming expectations. “Of course, conditions can recover relative to expectations, but, for now, we have entered a period of less encouraging growth relative to expectations and this is taking the shine off financial market performance. At present, the underperformance is only marginal, so this doesn’t imply that severe weakness in growth or risk assets is expected. A further deterioration would create clearer concerns,” he says.
Philipp Wörz, who manages the PSG Global Equity and PSG Global Flexible funds, says in a recent blog on the PSG website that his team has been concerned for some time about the generally elevated levels of global equity markets and “extreme investor complacency”. He welcomes the recent pull-back in the global markets because it offers buying opportunities.
“We believe that the prolonged lack of volatility provided limited opportunities to acquire quality assets at attractive prices. It may be long forgotten by some, but the S&P 500 Index rose for a record 15 consecutive months to the end of January 2018,” Wörz says.
He says you should bear in mind that, although markets have declined by about 10% from recent highs, many stocks are only back to where they were a few months ago.
“Conversely, we have been increasingly positive on domestically focused South African companies. Here, political and economic uncertainty has kept prices low, despite the inherent quality we see in these businesses,” Wörz says.
He says many investors underestimate the value of cash, which “is seldom evident in times of exuberance… The true value of cash tends to show itself when volatility rises, prices fall and liquidity is in short supply. It is then that it serves as valuable firepower to capitalise on market mispricing.”
Emerging markets were not immune to the recent volatility, say Franklin Templeton Emerging Markets Equity chief investment officer Manraj Sekhon and the company’s senior managing director and director of portfolio management, Chetan Sehgal.
In an overview of what has happened in the emerging-markets universe in the first quarter of this year, they voiced concerns about the potential impact of recent US-China trade tensions and volatility in the information technology sector in the light of Facebook’s troubles with regulators in the US.
“We believe prospects for emerging markets remain sound despite the recent [overall] increase in volatility. Emerging markets have historically bounced back from external shocks and they displayed a healthy resilience amid choppy trading in early 2018. We still see strong tailwinds underpinning emerging-market equities even as we are mindful of the challenges that may arise.
“Importantly, emerging-market economies look poised for further growth. The International Monetary Fund estimates 4.9% gross domestic product growth for emerging markets in 2018, up from 4.7% in 2017.
“While protectionist trade actions taken by the US have cast a shadow over the synchronised global growth that has lifted stock markets, the long-term outcome remains to be seen. The scope and strength of international trade flows should not be underestimated, as evident by the historical growth in intra-Asia trade,” Sekhon and Sehgal say.
THE SOUTH AFRICAN MARKET
The South African equity market declined in the first quarter, despite several positive developments. Franklin Templeton’s Manraj Sekhon and Chetan Sehgal say we underperformed our emerging-market peers, despite stronger-than-expected gross domestic product growth in the fourth quarter and an interest-rate cut in March.
The quarter saw ANC leader Cyril Ramaphosa sworn in as South Africa’s new president and international ratings agency Moody’s raising the country’s credit status from negative to stable.
Tsitsi Hatendi-Matika, the head retail investment specialist at Absa’s Wealth and Investment unit, argues in a recent blog that South Africa will achieve the growth it needs only once all the structural elements are in place.
“While ‘Ramaphoria’ put the nation on a brief high, sentiment can only go so far. Manufacturing production for February came out at 0.6% year-on-year, a slow-down from 2.4% in January, breaking five months of strong growth. Mining production positively surprised, increasing by 3.1% year-on-year, and, when seasonally adjusted compared with January, was 0.9%,” Hatendi-Matika says. She says not only is it a time for deep introspection but also to find ways to turn up the dial significantly.
She says there are many theories on how South Africa can generate higher growth, but “it is important to select some of the low-hanging fruit”, which are:
• Education. In addition to the R10 billion provisional allocation made in the 2017 Budget, National Treasury earmarked R57bn for tertiary education over the medium term, making this the largest-growing line item in the national budget, next to debt-servicing costs.
“As the new cabinet continues to work through structural issues, the school system will need to be re-assessed and reconstructed in order to see significantly different outcomes,” Hatendi-Matika says.
• Support of small business. With more support, small and medium enterprises (SMEs) will allow for greater diversification of the economy and better development of new and unsaturated sectors of the country, Hatendi-Matika says.
“SMEs will benefit in the digital age as they are more nimble, have more flexible resources and are more agile when compared with large organisations with a more rigid infrastructure,” she says.
There are many government initiatives to support SMEs, including a CEO initiative (a R1.4bn fund), the government’s small business and innovation fund (with R1bn allocated), its venture capital incentive scheme (R615 million allocated to SMEs), and the small enterprise development fund in collaboration with the Department of Science and Technology (R2.1bn over the medium term).
“Corporate governance, consistency of policies, effective government and reduction of corruption are other key avenues which will prove to be imperative to stimulation of growth in the new phase the country finds itself in,” she says.