• Stonewood AM

A Quarter to Recession?

Source: https://app.hedgeye.com/insights/49308-cartoon-of-the-day-recession-knocking

The word on every economist and every financial news anchors’ lips at the moment seems to be “recession”. Are we on the verge of a recession? Is it finally time for the much-anticipated recession? When will the recession manifest?

I am not referring to a South African recession but rather a US and/or global recession.

We are now entering unchartered territory as global equity markets continue to retrace to previous highs after the brief sell-off experienced last year. This has led to a bull market that now exceeds a decade post the Global Financial Crisis and the cause of the fear of late is a combination of the following factors:

  • Global growth by practically all counts seems to be coming under pressure and almost all regions of the world are showing some signs of slowing down.

  • US predicted earnings, after the respite offered by recent tax cuts, are being revised down across the board, which is always a warning sign of economic weakness.

  • The trade war between the US and China is yet to be resolved, which is having a global trade impact.

  • European economic data is, overall, showing signs of slowing and weakness in certain key areas.

  • The US Yield curve has recently inverted; this is where yields of shorter dated bonds are greater than longer dated bonds.

  • Stimulus in many economies remains necessary including the potential of further central bank and Fed rate cuts

It’s no surprise that some people are slightly nervous. Yet to counter this there are some interesting data points that do make the case seemingly less clear cut:

  • The world has not needed significantly higher or more traditionally normal interest rates as inflation has remained elusive almost worldwide.

  • US employment data has remained incredibly strong and has steadily improved showing the economy is not necessarily at full employment or surpassed that proverbial level.

  • Wage inflation has yet to manifest in a meaningful manner.

  • Global growth, although slow, is still enough to avoid real red flags.

All this talk of recession is rather interesting considering that the Global Equity markets have gone up by over 12% in USD, Year-To-Date. Global Bonds remain in positive return territory and Global Commodities are up more than 9% in USD.

The truth is that the world is not in recession but rather is encountering signs of a synchronized slowdown in global growth; in developed and emerging markets. There does also seem to be a synchronized drop in business sentiment and growth expectations, all of which could become self-fulfilling if you believe in the knock-on effect of sentiment.

Sadly, trying to time the next global recession is almost impossible for the most skilled professional investor let alone the average client or advisor. Sitting in cash as a strategy is not really a strategy because history has shown time after time, that timing the market is a sure way to miss out the periods of outsized returns that compensate investors for the tougher periods.

Is a recession possible in 2019? Absolutely. Is it certain? Absolutely not. In fact, most of these so-called “experts or pundits” actually expect 2020 to be the year it is likely to manifest (not that you should bother with expert predictions too much as they are as accurate as anyone else’s).

What we have learnt and can learn from history is as follows: We will have to go through many recessionary periods in our lifetimes; they can be short or long lasting, but no one can predict them with any accuracy in a consistent fashion and avoiding markets to avoid recessions is a bit like not going outside EVER because it might rain on the day you choose to take a walk.

If you are really concerned, ensure that you take a rain coat when you go for a walk outside. What would a raincoat in current investment terminology mean?

Here are a few ideas to consider:

  1. Diversify your portfolio across asset classes so that if a global recession does take hold you have some defensive or “shock-absorber” elements to your investment portfolio.

  2. Don’t have all your money in one market or one asset class.

  3. Remain invested even when things get ugly, you will be rewarded for your patience in the long run (assuming you have time on your side).

  4. Have some cash in your portfolio that gives you liquidity if you need it, but not so much that your portfolio is too defensive.

  5. Find an advisor that will help you make the right investment and portfolio decisions that match your risk profile and return objectives and then STICK TO THE PLAN.

Finally; the only thing worth remembering is that it will rain at some point, your timing may be dismal, and you may get caught far away from home, but it never rains forever. The sun does come out and dry you and your clothes even after the worst rainstorms.

All the best for Quarter 2 of 2019!



Market Update

Source: FactSet

With the 1st quarter of 2019 coming to a close, the South African equity market landed in positive territory up 1.6% for the month. This was predominately on the back of resources, which have dominated for the 4th consecutive month with gains of 4.7% for March. Industrials rose 2.9% as a result of rand hedge companies benefiting from rand weakness.

The South African Reserve Bank (SARB) took the unanimous decision to leave interest rates unchanged as inflation was in line with estimates at 4.1%, as seen below with all five members voting to keep rates at 6.75%.

The SARB expects inflation to average 4.8% for the year due to rises in electricity, fuel and food prices. Furthermore, they cut expected economic growth to 1.3% from 1.7% for 2019 citing slowing household expenditure and Eskom’s troubles as major structural challenges that will take time to overcome. Financials & SA Property were the laggards of the month dropping -4.0% & -1.5%, respectively.

SA Bonds ended March in positive territory, up 1.3%. Further reprieve was received from Moody’s decision to not announce changes in our credit rating. Thus, effectively affirming our current Baa3 status which is a step above ‘junk status’. This means that our government bonds remain in Citigroup’s World Government Index (which can only invest in investment grade bonds) and a global sell-off was avoided for the time being.

Global equities ended the month 1.3% in the green with Developed Markets outperforming Emerging Markets, adding 1.4% as opposed to EM’s 0.9% respectively. This was despite the disruptions around the umpteenth unsuccessful Brexit vote which was proposed by British Prime Minister Theresa May. She was granted an extension from the 29 March 2019 deadline to the 12th of April by the European Union (EU), however has officially written for a further extension to 30 June 2019.

European equities have had a stellar rally since the sell-off experienced in the last quarter of last year. The Stoxx Europe 600 Index (as seen below) has risen 17.0% from its December lows and closed the month closer to recouping the losses that started at the end of September 2018.

This was amid the backdrop of heightened geopolitics, slowing economic growth, reduced profit growth, as well as lower inflation expectations. The European Central Bank (ECB), on the other hand, left interest rates unchanged to try spur on growth in the EU and remain accommodative.

The Rand weakened against all major counterparts, with a decline against the US Dollar, British Pound and Euro by 2.6%, 0.5% and 1.1% respectively. Gold saw a slight decline as investors continued to be risk-on, while oil strengthened on the back of continued supply cuts.

As mentioned above, last month saw the US Yield curve invert, defying conventional risk theory that one is rewarded for holding an asset over the long term. Many pundits see this as a precursor to a potential recession. Most asset classes were however buoyed by softer monetary policies across the globe, as well as the extension of the deadline for the US and China to reach a trade agreement which has global implications for all nations.


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