Newsletter

January 2020 Newsletter

Welcome Back to 2020!

Performance

The year began with an optimistic tone as global markets continued their rally, mainly being pushed by U.S markets, driven mainly by the technology sector. Last year, global equities were up 24.1% with the U.S. being the best performer and emerging markets being the worst. The American economy set an all time high and the world breathed a sigh of relief as the U.S and China signed the initial trade deal termed ‘Phase One’. This doesn’t equate to tariffs being removed against China as this depends on the compliance of China. Also, China would purchase $200bn worth of U.S farm products and the U.S. would stop seeing China as a currency manipulator. China, to combat the effects of the trade wars, eased funding for their banks thereby cheapening credit.

Across the pond, we saw the U.K leave the European Union as the markets began to worry about the conclusion of a trade agreement between the two parties and how that would be structured. The UK economy, reflecting the tough time endured due to the Brexit saga, released weak economic data and the Bank of England did nothing to ease the situation by holding onto rates, much to the disappointment of markets. With the EU, Francine Lagarde became the ECB President, the first female to take the position, and maintained her stance on looking to clean up the European Union’s economy.

However, the month of January followed with two economic shocks which contributed to negative returns for the month. Firstly, the U.S/Iran tensions exploded onto global markets as the U.S performed a targeted strike against the highest general of the Iranian army, killing him in Iraq. This caused the jumping of the gold rice to $1600 and oil reached above $70. Markets prepared for an impending war to break out as rhetoric increased between the two countries. But fortunately, war was averted. The second shock was the beginning of the Coronavirus, a virus that emanated out of Wuhan, China that had a similar pattern and related to the SARS virus. As the numbers of casualties increased, so did global markets continue to worry about the disease and its spread across Asia and the world. What startled the market was the $170bn pledge of investment into the economy by the Chinese government as a measure and the building of a hospital in a week to house the number of infected individuals. As the month came to a close, global markets sold off and this contributed to the final total returns of -3.06% for SAPY and -3.30% for the ALPI indices whilst equites were also down by -1.69% as there was a flight to safety in terms of cash, gold and bonds.

Back in South Africa, the gloomy picture that was 2019 continued as consumer confidence numbers came out, showing that for the third quarter, confidence was -7%. Added onto this was the confidence of business owners which was lower than expectations at 45.9% as stage 2 power cuts by Eskom continued. All these factors affected retailers which released lack lustre results for the festive season. More importantly, Massmart announced the restructure of the business by shutting down DION Wired and letting go of 1500 employees. For 2019, the retail sector was down by 22%. Telkom as well jumped onto the bandwagon by letting go of 3000 employees as the business looks to reduce its head count. With all of the negative news, the IMF added onto the woes by cutting expected GDP growth of SA to less than 1% for 2020 and less than 1.5% for 2021. With all of this negative news, a sigh of relief was had as the SARB announced the cutting of interest rates by 25bps to ease the pressure on consumers. Also, the much anticipated downgrade of South Africa in March was delayed by Moody’s, stating that it was too early to downgrade the country’s rating.

Property

Local property now sits at very cheap rates with dividend yields now at an average of 10%. That’s means that for every R10 you place into listed property, you will receive R1 in dividends for the year before any capital growth or decline as opposed to cash in the bank that yeilds approximately 6%. The delaying of a possible downgrade has helped the investment grade ability of the local property stocks. Since half of the portfolio is offshore, this helps the growth of stocks as the Rand weakens due to domestic issues such as Eskom. Even though offshore dividends are expected to be in the region of 5% they are still anticipated to grow between 3-5% for the year as oppose to being flat in South Africa for 2020. We tilted the portfolio more towards offshore with the buying of additional UK stocks, especially those with high exposure to London due to the discount in value when compared to other European cities such as Paris and Frankfurt. The cheap valuations of London property stocks have primarily been driven by Brexit. We anticipate that as the British government gets on with it, large investments will flow back into the city as the economy recovers and as the consumer begins to spend again.

Leave a Reply

Your email address will not be published.