February Overview – Thanks to Nic Spicer and Brendan de Jongh of Portfoliometrix

Risk assets continued to perform well over the month except for local property which blew off some steam after a very strong month of performance in January (+9.18%). Strong hard currency returns and general weakness in the rand resulted in good performance from global equities, developed market equities in particular, in rand terms. In US dollar terms, global bonds pulled back as global interest rates rose.

The South African economy continues to limp along with a flurry of negative data points from production and sales growth, confidence and purchasing managers’ index (PMI) readings. On the positive front, January’s inflation came in lower at 4% year-on-year, easing the pressure on the Reserve Bank to hike interest rates. Unemployment figures eased to 27.1%; however, the factors driving this decline are structural and without any growth in the economy there will be limited scope for further meaningful reductions.

The rand weakened over February, particularly against the pound sterling, as interest rates in developed markets rose, resulting in a general depreciation of emerging market (EM) currencies. The table below summarises the rand’s performance against a number of major currencies for the month:

In the UK, the pound strengthened over the month as markets interpreted recent political events as lowering the chance of a no-deal Brexit. Specifically, Prime Minister Theresa May was again voted down in parliament on the 12^th, which now means that MPs will vote on whether to leave the EU without a deal. It is expected that this will almost certainly not be the case which would mean that a further vote will be held as to whether an extension to Article 50, and the UK’s leaving date, should be extended.

Economic growth in the US remains robust, with 2018 fourth quarter growth coming in at 2.6% annualised. US companies reported solid earnings growth in Q4 2018 with roughly 70% of companies beating estimates. Guidance was, however, more cautious, with management teams citing higher wages and tariffs. The minutes of the January Fed meeting were particularly dovish, with an end to quantitative tightening by year-end discussed, a move which pushed down longer-term bond yields. 

Evidence of weakening growth in Europe persisted; the second estimate of Q4 2018 growth remained at 0.2% with Germany not growing at all. Trade uncertainty also raised its ugly head again with auto manufacturers (Germany in particular) at risk of the potential introduction of higher tariffs on foreign-made cars by the US. However, data suggests that the industry is on top of the new auto emissions regime. Other bright spots included better-than-expected French growth, a rise in the flash eurozone composite PMI and higher consumer confidence. Banks also look set to receive support as the European Central Bank (ECB) talked about introducing targeted longer-term financial obligations (TLTROs) at its March meeting. The European political outlook continues to dog European assets though with ongoing political uncertainty in Spain and Italy, and an increased likelihood that the mainstream European Parliamentary parties will lose support in favour of more populist groups with less constructive views on reform in May’s elections. 

Japanese Q4 2018 growth rebounded, up from -2.6% in the third quarter to 1.4% annualised in the fourth. However, activity remains subdued and the Bank of Japan remains far from meeting its inflation target. Ongoing loose monetary policy is therefore likely for the foreseeable future.

In China, policymakers implemented a mix of fiscal and monetary measures to support growth. Coupled with the positive US-China trade negotiation noises, this has seen sentiment towards China pick up. Likewise, sentiment towards Brazil and Latin America is also positive at present as Brazilian President Bolsonaro’s government begins work on crucial pension reforms which could help stabilise government spending and debt. Elsewhere in emerging markets though, challenges persist with activity weak according to PMIs and a number of countries, including India and Turkey, struggling with inflation after previous currency devaluations.

Asset Classes

A summary of the month’s asset class performance is shown below:

Local Asset Classes 

GBP Asset Classes

USD Asset Classes