January  Overview  –  Nic Spicer and Brendan de Jongh (PortfolioMetrix)

South Africans remained fixated on the testimonies coming out of the Zondo commission as the breadth and depth of corruption and state capture was revealed by a number of individuals. Given the state of affairs described in the Zondo commission, it is no surprise that economic data coming out of South Africa remains frustratingly tepid with low confidence and general activity. From a data perspective, annual inflation as at December 2018 fell to 4.5% from November’s reading of 5.2% mainly on the back of a falling oil price and the strengthening of the rand. The South African Reserve Bank (SARB) kept interest rates (repo rate) at 6.75% acknowledging a falling inflation environment and a struggling economy. However, the Reserve Bank Governor, Lesetja Kganyago, had to once again reiterate its independence and mandate following the ANC’s release of its election manifesto which hinted at broadening the mandate of the Bank amongst other negative initiatives such as further implementing prescriptive assets on financial institutions.

The rand strengthened significantly over January, particularly against the US dollar, as risk appetite returned to markets following a skittish December. The table below summarises the rand’s performance against a number of major currencies for the month:

Brexit uncertainty continued to dominate the headlines in the UK. Theresa May’s exit deal with the EU was heavily defeated earlier in the month and sent back to the EU to renegotiate the Irish backstop. So far, the EU have rejected calls to reopen talks, making the final outcome uncertain, but the series of votes did also demonstrate that there is a clear majority of MPs who are against the UK exiting the EU with no-deal. Markets seized on this indication which led to a strengthening of the pound against major trading partners and a strengthening of UK domestic equities. Away from Brexit, the UK’s labour market continues to perform well, with unemployment falling to 4% and wage growth at 3.4%, healthily above inflation.

The US government entered the year with a partial government shutdown until Trump finally backed down on 26 January, a full 35 days after the longest shutdown in history began. This, along with the ongoing trade dispute with China, were big factors in some weaker data starting to emerge, including a big fall in the ISM manufacturing survey to 54.1 as well as falls in various consumer confidence surveys. Not all data deteriorated though, with markets buoyed by some strong labour market data. Despite strong wage growth, inflation fell to 1.9% year on year, which was used by the Federal Reserve as part of the justification to be more patient on raising rates this year. Bond markets are currently pricing in no further rate rises in 2019.

Continental Europe, the European Central Bank (ECB) kept rates on hold and maintained its balance sheet reinvestment policy, but did state that it believed the risk surrounding euro area growth had moved to the downside. Still, it wasn’t all bad – consumer confidence in the eurozone picked up slightly, unemployment fell further to 7.9% and lower oil prices (combined with the improving labour market) should continue to support eurozone consumption.

In emerging markets, China slowdown fears continue with fourth quarter GDP growth falling to 6.4% year on year. To combat internal weakness and the pressure from its trade spat with the US, Chinese authorities have been providing modest stimulus to the economy. The People’s Bank of China (PBoC) cut the required reserve ratio banks must hold by 1% in January in order to inject liquidity into the economy, which it estimates should be in the order of roughly RMB 800 million, or 0.8% of GDP. Further easing is expected throughout 2019 combined with some additional infrastructure spending. There is some evidence that these measures are working, with recent retail sales and industrial production beating expectations.

Asset Classes

Global risk assets in hard currency recovered strongly in January with global property leading the charge after a difficult 2018. Global equity markets in general recovered strongly; however, when translated into rands, returns look less compelling due to the strengthening of the currency. Local property was comfortably the strongest performer for the month in rand terms as the asset class recovered from one of its worst years of performance in 2018. South African asset classes in general achieved good returns for the month as risk appetite filtered back into markets.

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