Market Update - January 2019
The positive momentum that was present in the last few weeks of 2018 has continued into the new year with local and international markets rising for the month. South African equities, as measured by the All Share Index (ALSI), closed 2.8% higher despite SA’s business confidence taking a slight knock in January. Large caps contributed the most with gains of 2.7%, while mid and small cap counters added 2.3% and 2.0% respectively. A far more positive start to the year than many would have anticipated.
SA’s headline consumer inflation met expectations slowing to 4.5% for the month of December from 5.2% the month prior, giving Governor of the SA Reserve Bank (SARB) Lesetja Kganyago room to keep the repo rate unchanged. Financials ended the month 6.0% higher and the Property sector surged 9.2%, after losing more than 25% in 2018 to become the months best performing asset class.
Locally, we saw the hosting of the 25th African Mining Indaba which aims to create a deal-making forum for the mining community in Africa. This was the first conference where a SA president had addressed the event and reassured the audience that property land rights around land expropriation without compensation would be enhanced, though the details were not divulged. A new mining charter (which was contested by the industry during the previous presidency) has been finalized and largely welcomed by the mining sector.
Resources closed 3.3% higher despite mining output falling 5.6% year on year, mainly due to gains in Iron Ore and Brent Crude oil, with the latter continuing its lead as the best performing asset class from the year of 2018.
The month of January was quite eventful in that the World Economic Forum (WEF) went ahead without many of world leaders present, team SA however was well represented. President Trump gave it a miss to deal with a US government shut down lasting from the end of December 2018 to 25 January 2019; 35 days, was the longest US Government shut down in history.
The effects of this partial shutdown remain to be seen despite the unemployment rate ticking slightly higher to 4.0% the economy added 304,000 jobs in the month of January which was well above the 165,000 jobs expected, and wages continued to increase from the last couple of months.
Government has been re-opened for 3 weeks until 15 February to allow for negotiations, however Trump continues to demand the $5.7bn funding for a US-Mexico border wall of which he explicitly expressed in his delayed (due to the partial shutdown) State of the Union address. Despite this, US stocks remain positive.
We also saw the International Monetary Fund (IMF) cut world growth forecasts for 2019 to the slowest pace in 3 years as economies are growing slower than expected and economic risks are mounting. IMF managing Director, Christine Lagarde, cited higher tariffs and rising uncertainty over future policies as significantly higher risks. This fed into lower asset prices and higher volatility during 2018. The IMF downgrade was the second downgrade in three months due to slowing demand across Europe.
The IMF’s projections of the US and Chinese economies remain unchanged, in spite of many investors fearing a U.S-led slowdown and China revealing its slowest annual pace since 1990, coming in at 6.6% for 2018. Developed Market and Emerging Market (EM) equities, however, were up strongly regardless of downward revisions of global growth at 3.5% for this year, from the 3.7% expected in October.
Geopolitics are in the spotlight with on and off trade tensions between the US and China, the heightened probabilities of a no-deal Brexit and a weaker world economy. Equity markets were seemingly immune to the above, the effect was seen more in the depreciation of the US Dollar, Euro and British Pound with the Rand (ZAR) gaining 7.8%, 7.4% and 4.7%, respectively.
The ZAR was not the only benefactor as the above graphic shows that flows to EM currencies increased substantially during the month of January. Fundamentals in EM economies have not improved much, which is indicative of investors being bearish on the USD as opposed to bullish on the EM currency basket
Analysts are of the view that the dovish stance that the US Federal Reserve has taken also spurred demand. Fed Chairperson, Jerome Powell, kept interest rates unchanged and signaled that the expected rate hikes for 2019, were likely to be fewer than historically signaled, citing the risks mentioned prior. He further mentioned that they wanted to observe the effect of the Fed’s rate increases over the past two years on the American economy.
An upsurge of 15.0% in the price Brent Crude Oil occurred in January while Gold and Platinum rose 3.2% and 3.1%, respectively. The rise in Oil was on the back of the Organisation of the Petroleum Exporting Countries (OPEC) cutting output sharply by 751,000 barrels per day in December. The group cut its forecast for average daily demand as the global economy slows.
Locally, the discovery of Oil and Gas deposits made in the deep waters of the Southern Cape may have investors excited for the prospects of SA. President Ramaphosa is one of those excited as mentioned in his State of the Nation Address (SONA). He made three salient points in his speech (unrelated to the oil discovery), namely:
The creation of a new ‘Scorpions-like’ unit within the National Prosecuting Authority (NPA)
The unbundling of Eskom into three separate entities
Interventions and incentives to accelerate job creation
He also set the 8th of May as the day voters will head to the polls to elect who will lead us for the next five years, and as much as his SONA was filled with political rhetoric, SA has improved relative to where we were last year. We look forward to hearing about the financial position of the country which will be delivered by Finance Minister, Tito Mboweni, in the coming weeks and how the government plans to manage the state’s finances.