Market Commentary




By Shoaib Vayej – Portfolio Manager

Trade war uncertainty crimps global growth

“When elephants fight, it is the grass that suffers” African proverb

Global growth has moderated from the above trend, synchronous conditions experienced at the start of 2018. This is despite monetary conditions remaining very accommodative for the current levels of nominal growth. The United States (US), the world’s largest economy, has remained resilient in the face of this moderation, primarily due to tax cuts introduced by the Trump administration. The positive impact of these tax cuts will fade in early 2019 whereas other major economies are starting to exhibit positive economic surprises, indicating a healthy convergence of growth in future.

The same Trump administration has continued ratcheting up the trade war with China, its largest trading partner. At the beginning of the third quarter the US implemented tariffs on $50bn of Chinese imports. By the end the quarter 10% tariffs were levied on an additional $200bn of imports, with the rate rising to 25% in the New Year. The US lately threatened to impose 25% tariffs on another $267bn of imports. Were this final phase to pass the US would have implemented tariffs on almost all of its imports from China. The outcome of the US mid-term elections, scheduled for 6 November 2018, could be key for diffusing an escalation of this trade war, assuming the Democrats win back the House of Representatives.

China has intentionally reduced its exposure to international trade in the decade since the global financial crisis. However, the estimated impact of US tariffs announced to date on the Chinese economy would still create a negative 1% drag on GDP growth, assuming no policy response. The Chinese government has already countered the trade actions somewhat by devaluing its exchange rate and promising further stimulus measures. The Chinese have been tightening policy of late, witnessed by a pull-back in infrastructure spend, which creates capacity to offset these new tariffs. The Chinese response to US tariffs is a key policy risk for markets. The impact on the US economy is expected to be negligible thus far. While global economic and trade growth have moderated they still remain positive and supportive for risk assets.

The economic divergence mentioned earlier, risk aversion due to trade tensions and the consistent normalization of short term rates in the US has led to further US Dollar strength. The US Dollar Index peaked in mid-August, more than 10% above the lows reached earlier in the year. Emerging markets exhibiting a combination of weak (large negative) current account and fiscal balances, like South Africa, are prone to weakness in these strong Dollar episodes. This explains why some contagion has spread from the currency crisis in Argentina and Turkey to the South African Rand. South Africa does however have lower levels of exposure to foreign currency debt (21% of GDP) which engenders some resilience relative to Turkey (51% of GDP) and Argentina. The expected convergence of growth together with the current extended speculative positioning in the Dollar should see some pressure easing in future.

South Africa has been in a technical recession during 2018, with a -0.7% GDP decrease reported in the second quarter after a revised -2.6% GDP decrease in the first quarter. The poor economic situation is receiving urgent attention from the government, with President Ramaphosa launching a “Stimulus and Recovery plan” towards the end of the third quarter. Initial signs of the economic reforms are positive for example easing travel restrictions, and creating greater policy certainty for the mining sector. There is also the promise of the reprioritization of R50bn of spend towards support for black commercial farmers, economic activity in townships and rural areas as well spending on education and health. The establishment of a R400bn infrastructure fund within the presidency, is meant to better co-ordinate and prioritise spend and to catalyse co-investment from the private sector. After quarter end a Jobs Summit took place, with the promise to add 275,000 jobs per year. The next quarter will see some key economic events for the country: Investment conference showcasing opportunities to investors, the tabling of the Medium Term Budget in parliament and the Moody’s rating review.

Emerging markets dislocate

The last quarter marked the 10th anniversary of the collapse of Lehman Brothers, a pivotal moment during the Global Financial Crisis. Since those lows the S&P500 has shown good returns of almost 9%pa. In US Dollar terms the JSE All Share has lagged significantly with just more than half of those returns, with all of those returns generated in the 1st 3 years of that decade. The JSE has been almost flat in US Dollar terms for the past 7 years.

Global equity markets continued their strong run during the past quarter yielding total returns of 5.6% in US Dollars, with emerging markets underperforming with a -0.9% return. The MSCI SA equities index was one of the worst performing globally, returning -7.2% in US Dollars. The Rand was 3% weaker in the quarter, given the selloff in emerging markets. From an asset class perspective, SA equities underperformed bonds and cash, by approximately 5%.

The Resources sector continues leading the market as it did in the 2nd quarter, returning 5% this quarter. The Platinum majors, Impala Platinum (+36%) and Anglo American Platinum (+29%), were the leading shares amongst the Top 100. The Platinum Group Metal (PGM) basket price has provided support, driven by a weaker Rand exchange rate as well strong rallies in some of the minor metals such as Rhodium and Ruthenium. Impala Platinum also announced its strategic review of the Impala Rustenburg mine during this quarter, a recognition of its unsustainable path. Anglo American Platinum announced a strong set of results and is the first PGM producer to resume dividend payments, a clear show of strength. Exxaro was also a strong performer, supported by its new dividend policy that will see it paying out all of the dividends received from Sishen Iron Ore Company. This and the upcoming disposal of its remaining stake in Tronox should see some reversal of its holding company discount for this asset.

The Industrial sector was the worst performing, falling 8%. Aspen Pharmaceuticals was the worst performer amongst the Top 100, falling 36%. This was on the back of financial results that missed expectations, including sale of its Infant Milk Formula business at a price less than analysts’ estimates. MTN was another notable laggard, falling 21%, with issues again arising in Nigeria. MTN was fined $5.2bn in 2015 for failing to disconnect unregistered subscribers, eventually settling for a $1.7bn payment and an agreement to list MTN Nigeria in Lagos via and Initial Public Offer (IPO). At the end of August 2018 MTN were issued with a letter from the Nigerian Central Bank demanding $8.1bn be paid to them relating to dividends paid out of MTN Nigeria since 2007. MTN has refuted the claim stating that correct procedures were followed and approvals received. Within a matter of days MTN lost more than $5bn in market value, and has since recovered around half of this.