With 2019 rapidly unwinding, it is an opportune time to reflect on the year that was and to cast our eyes ahead to 2020. But first, let’s rewind to 2017, an uncertain and difficult year for South Africa’s economy. As we sat on tenterhooks to find out who would lead the ANC and the country, global markets were booming and the S&P500 gained every month in 2017 for the first time.
With Cyril Ramaphosa securing a narrow win in the ANC elective conference, we entered 2018 on a more optimistic footing. President Zuma was elbowed aside in the early months of the year, and we all held high hopes that South Africa was, at last, on a path of reform and renewal under the eye of a more market-friendly and inclusive administration.
But local and international sentiment rapidly soured as US President Donald Trump ratcheted up the trade war rhetoric, Brexit destabilised Europe and the UK, and it became clear just how difficult it would be to clear the deep rot of the Zuma years in South Africa. Stock exchanges around the world ended 2018 down as a result of this cocktail of concerns and events, and our JSE was no exception.
Braced for a difficult year
At the outset of 2019, the same issues were in play and most market commentators were braced for a tough year. Yet, despite the air of negativity, we commented that valuations were not stretched, and we were hopeful of a better 2019. The global returns across all our selected portfolios in 2019 have far surpassed all expectations, including our own, and we’ve seen returns most investors would have grabbed with both hands at the beginning of 2019.
Locally, the JSE All-Share Index has risen by 12.4% this year to date, despite turbulent trading for shares such as Aspen, Tongaat, EOH, Sasol and Brait. Pleasingly, our two domestic proprietary funds have yielded returns above their respective benchmarks, and well ahead of their peer groups. Meanwhile, largely thanks to the booming US economy, international stock markets have performed even better. The S&P 500 has climbed 29.9% and the MSCI World Index is up 25.1% for the year to date – solid returns by any measure.
As a fresh round of load-shedding hits, South African Airways enters business rescue, and further downgrades of the sovereign debt rating loom, South Africa is exiting 2019 on an especially low note. As for the offshore markets, scepticism continues to prevail, with trade wars and Brexit still in the headlines and growth in key markets like China and Germany faltering.
Doom & gloom overplayed
Within that context, we can see in retrospect that much of the gloom and doom of the past three years was heavily overplayed. So, what can we expect of 2020? Our base case is that we will not see a global recession in the upcoming year, with many indicators suggesting that the world economy may already be ticking up. However, global equity market returns are likely to be a lot more subdued, as much good news is already priced in.
Looking to the US, the unpredictable incumbent president will undoubtedly focus on his upcoming election campaign, although trade wars and sabre rattling will unavoidably be a prevalent theme. There is as much reason for concern in Europe, where the Eurozone needs some fresh thinking to keep economies on a healthy growth path.
Brexit will continue to cause uncertainty, despite Boris Johnson and the Tories getting a resounding majority in the election last week. We can expect a repeat of last year’s rollercoaster ride as the UK rushes to tie up a trade deal with the European Union before the end of the transition period in December 2020. In other words, expect a bumpy ride, even if there is not a global downturn.
When it comes to South Africa, we can expect increased frustration with the pace and direction of structural reform, leading to continued weak economic growth and rising social tensions. In this scenario the sovereign debt metrics are likely to deteriorate even further. It seems likely that the rand will continue to slide and that economic growth will be weak, especially since it’s probable that Moody’s will finally downgrade South Africa’s credit rating to junk in March 2020, a factor that our analysis shows is not at all priced into the level of the rand at current levels. (Indeed recent rand strength has been solely driven by global factors). Our view is that better growth opportunities continue to beckon abroad with lower risk.
We are mindful of the risks to global stock markets and are proactively shifting more towards ‘quality‘ – as opposed to ‘value’ as a defence mechanism, whilst keeping our clients’ asset allocation models largely intact. By investing in quality funds and assets, we will be better positioned to manage short-term volatility, while also exposing our clients to the medium-term growth opportunities offered by global markets.
Finally, for our more conservative investors who wish to wait on the side-lines, our fixed income dollar-based solutions are positioned to continue to offer a very substantial yield pick-up versus dollar cash.