Roeloff Horne’s – Director & Head of South African Portfolio Management – quarterly market report for portfolio clients and subscribers to our regular updates.
“Where we had Central Bankers saving an illiquid market during the credit crisis, by introducing quantitative easing and driving interest rates lower, we now have global and local political events influencing markets on a daily basis. Evidenced in December 2015 with Nenegate and then followed by a 2016 Brexit Vote, a Trump US election victory and the most recent 2017 SA Cabinet reshuffle – all soon to be followed by upcoming European elections and a protracted Brexit negotiation process between the UK and Brussels. What is next? A geopolitical event maybe?
Globally, we now live in a period of weak growth, a low yield environment where income-seeking investors and central bankers throughout the world are ignoring the ‘noise’ and buying Developed Market (DM) bonds until the yields plummet to 0%, or even negative rates, irrespective of the ability of governments to fund the debt over the long term. This causes Emerging Market (EM) currency appreciation, something which does not necessarily concur with the economic fundamentals of the respective country.
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Global and Local Economic Background
The good news is that global GDP growth, Purchasing Manufacturing Indices (PMI – an indicator of the economic health of the manufacturing sector) and Inflation are accelerating in the US, UK, Europe and EMs. A growing proportion of global GDP growth is now dominated by EMs (China, India and Latin America), but we believe that with Trumponomics, China, Russia and North Korea’s domination are increasingly being seen as global geopolitical risks. Most equity market collapses in the past have been preceded by a liquidity crisis, which currently is not our base case scenario. Although China and the US are flirting with liquidity issues, both countries have sufficient monetary and fiscal tools to deal with liquidity risks, and China’s shift from a manufacturing to a service-based economy is serving them well. Historical Chinese consumer habits have now urbanised into technology, and the economy is now exporting inflation, relative to a historically cheap labour practice, causing a deflationary impact globally. It is safe to say that, globally, deflationary forces are receding, while we experience a synchronised global growth scenario.
Closer to home, South African economic indicators were looking much healthier, up to 23 March at least. The current account and terms of trade improved as exports accelerated, relative to slowing imports. The currency appreciated to R12.33 against the US dollar; food inflation plummeted as the rain in the northern parts of SA created a healthy supply; the oil price stabilised near USD50; inbound tourism is booming and accounts for almost 12% of SA Gross Domestic Production (GDP). All of this was potentially leading to a significant slowdown in inflation, which may eventually have led the SARB to lower interest rates in SA later this year. The obvious consequence would have benefited the SA consumer and lead to improved economic growth. However, we then experienced the Cabinet reshuffle and an S&P Global Rating Agency downgrade of SA’s sovereign debt…”
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Quarterly South African Market Review - Q1, 2017
