• James Twidale & Haidee Chiat

A BIT of pain... the year that was 2018

Happy New Year to everyone from the 1st Fusion Asset Management Team. All the very best for the year ahead. We only hope its not as painful for investment markets as 2018 was.

2018 was, no doubt, a frustrating year for investors and market participants but was also not anywhere near the magnitude of some of histories infamous crashes or protracted bear markets. There were some tough pills to swallow and there were very few places to hide:

Global equities = Negative

Local equities = Negative

Gold = Negative

Global Bonds = Negative

Local Property = Negative

Commodities = Negative

Interest Rates = Up

ZAR = Weaker

The amount or percentage of people who would have guessed that the above would have been the outcome at the end of 2017 would be very small. Yet the number of people who would have predicted that Bitcoin was the latest and greatest invention that the world had ever seen was rising no end.

2017 saw Bitcoin as measured by the price of BTC in USD($) rise from $968.23 on the 31 Dec 2016 to $13 860.14 on 31 Dec 2017 rise by 1 231.47% in that year, making a few people across the globe very rich indeed.

So, it was no surprise then that investors across the spectrum were flooding into Bitcoin despite the fruitful year that was had by other investment vehicles and asset classes over the course of 2017. Surely you could see that this was the proverbial “no-brainer” for a million reasons, promoted by the sudden array of cryptocurrency experts and enthusiasts that had cropped up overnight.

Fast forward a year to the end of 2018 and the price of Bitcoin had capitulated to $ 3 740.51 from the lofty level of $ 13 860.14. A shocking loss of 73.01%. Ouch!

Source: buybitcoinworldwide.com

There are a few points to this message which I think are probably sage advice come the beginning of a new year when one does a lot of financial introspection (See November 2018 Newsletter).

Firstly, if it’s hot, like red hot, then its likely not to be as attractive as you think it is. There are thousands, if not millions, of proverbial investor tombstones for those who chased bubble assets.

Secondly, if you think last year was tough for the market think how bad it was for the guys who sold their house, car and unit trusts to buy Bitcoin.

And finally, the predictions for the year ahead are likely to be rosy, they always are. Many will disappoint, they always do. What you think you know now is likely to prove incorrect and chances are this time in a year you will be doing the same thing and kicking yourself for not doing the thing that seems so obvious in the review mirror (like investing in cash instead of equities over 2018).

So, to conclude on a similar note to the one I commence with every year. No one has a crystal ball, not your investment manager, your advisor or you (whether you like to think you do is a discussion for another day). Therefore, all we can promise is that we will continue to treat your money as if it is our own, make the best long-term investment decisions we can, avoid the investing pitfalls and errors that we can and make sure that we ensure that you have the highest chance of achieving your investment objectives by following our investment philosophy.

We look forward to another year helping you invest your hard-earned money. We cannot promise we will look back and say it was an easy year, but we also cannot say it will be disappointing. We must prepare for both because the market will be the market, and your money is important to us.

All the best for 2019 and we look forward to a prosperous year ahead.


The month of December ended the year with SA’s equity market on a slightly more positive foot, as December’s performance boosted returns for 2018. The positive performance can mainly be accredited to Resources which showed a gain of 12.3% as investors fled to the safe-haven asset, Gold. See below the correlation that Gold (yellow) has had with the JSE All Share Index (white) for the month of December:

Gold (XAUUSD) Return vs ALSI Return

Source: Bloomberg

Large and mid-cap companies have shown a notable upswing which reversed some of the drawdowns experienced in this sector most of last year. Bonds were relatively flat, while Property continued the current downward trend closing -1.1% for the month of December.

Ratings Agency, Fitch, has kept SA at sub-investment grade with a stable outlook but has warned that rising debt levels and low growth pose a risk to the country. Eskom’s debt bailout request could possibly hinder the country in this regard and will be interesting to see how this will pan out. Although a bailout would have no real effect on our already sub-investment grade rating, we would like to see our outlook improve.

In contrast to the positive month that local market investors experienced, offshore investors had a tougher time during December. Global unrest has caused a decline in both Global and Developed Markets of over -7%, ending 2018’s return at -8.5%. This was despite the US economy adding 321 000 jobs in December, well above expectations and is indicative of robust economic growth.

Trump’s demands for funding for the Mexico-US border wall and ongoing threats to shut down Government has put pressure on Global Markets. Added to this political rhetoric, the Federal Reserve Bank raised interest rates for the 4th time in 2018, ignoring the current equity selloff. The Fed did however send signals that it’s rethinking its pace of rate hikes, decreasing the projected hikes to only 2 for 2019. Simultaneously, US bonds are seeing a possible inversion as the long end of the curve has a lower rate than short term rates, which has been seen to signal a recession in the past. An interesting graph below shows historical probabilities of a US recession vs where the current probability of a US recession is, hinting that there is little likelihood of an immediate recession:

Probability of a US Recession from 1970 to Present in 4-year intervals

Source: Bloomberg

Downward trends in Global Markets in the last 3 months have been exacerbated by the negative performance felt throughout Europe. Unrest in France, Italy budget concerns and the possibility of the UK leaving the EU without a Brexit deal added further downward pressure. The graph below shows the adverse performance of the major market movers in the Eurozone being France -5.2% (white), Germany -6.2% (green), Spain -5.9% (purple), Italy -4.5% (red), Netherlands -6.8% (orange) for 2018:

Major market movers in Eurozone - 2018

Source: Bloomberg

Emerging Markets (EM) continued to decline by a further -2.6%, ending the year with a -14.2% return. The deceleration in China led losses in emerging markets, with Asia showing poor third-quarter growth reports. Chinese spending and manufacturing displayed a sharp slowdown adding to the gathering gloom around the international economy. The ongoing Trade War with the US is weighing heavy on China, which can be seen with a $2.4 Trillion loss in the Shanghai Composite Index. Retail sales grew 8.1%, which is the slowest pace in 15 years, while factory output rose 5.9%, the weakest in just under 3 years. Below a graph showing the index from its 2015 peak and is now 1/10th of the level reached 3 years ago.

Shanghai Composite Index 2015-2018

Source: Bloomberg

EM currency weakness has been an attribute of disruptive developed market geopolitical developments rather than local events. Further, it has suffered from EM contagion sparked by political woes from Argentina, Turkey and Mexico as well as the risk-off trades spurred by faltering international economies. However, this December has shown an appreciation in many of the EM currencies, excluding the ZAR which showed a 3.7% depreciation against the US Dollar.

Oil dropped a further -8.4% on the back of Saudi Arabia raising output to above 11 million barrels a day, for the first time in its history adding to the current supply glut. This move was an attempt to counter the sanctions placed on Iran by President trump. This led to SA experiencing 2 petrol price decreases over November and December but were not as substantial as that experienced by other countries due to ZAR weakness.

On a more positive and contrarian note for SA, Gold’s value has risen by a noteworthy 4.8% in December as investors move to safety assets. The value of Gold and the weakening USD/ZAR has benefited our mining industry, which is a major player and contributor to GDP.

Wishing you all the best of fortunes for 2019!

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