For weary SA investors, there are a number of specific near-term concerns both at home and abroad. However, there are several potential catalysts that could address the uncertainty in key markets.
Let’s take a closer look…
1 – The SA election outcome and subsequent actions to improve economic policy and address the dire State-Owned Enterprises’ (SOE’s) financial conditions:
- The ANC victory with Cyril Ramaphosa as the leader and President has been well received by markets to date.
- This does not mean that the longer-term outlook is improving, but rather that investors are giving Ramaphosa a chance.
- There is a view that SA assets are undervalued – and any major improvement in local business confidence, economic policies and tough calls to address SOE’s longevity should see these asset classes rally. That said, a lot depends on several global catalysts playing ball!
2 – Will there be a deal between the US and China to end the trade war?
- The US China trade talks took a new turn recently as the US implemented more stringent tariffs, and China retaliated by announcing its own measure on US goods. Is this a game of chicken, or is this just the early exchanges in a long-term power struggle between the two largest economies in the world? We do not know the answer, but what we do know is that it creates further uncertainty in capital markets. The uncertainty can lead to lower economic growth for the US and China, higher inflation and potentially a US recession in the next 12-18 months.
3 – Hoping for a definitive outcome to the UK and the EU’s Brexit negotiations.
- Any outcome is preferable to the current state of play!
4 – Improving SA, emerging market and developed market corporate earnings
- Margins are under pressure for SA’s domestically-focused companies, and unemployment numbers are increasing dramatically. Any positive reforms, as mentioned, can turn this tide – but it will take time to heal the wounds of the past.
- US corporate earnings are slowing, but still on a positive growth trajectory.
- In Europe and Asia, earnings results are mixed but are not falling off a cliff.
5 – An end to the FED’s rate normalisation cycle
With regard to exposure to risk assets in SA or globally, markets behave in a forward-looking manner and react quickly to new, positive information. Looking ahead, ‘one must be in it to win it’, so to speak, and to ‘time’ markets remains impossible. Savvy investors should therefore sit tight.
This is an abridged version of an article by Roeloff Horne, Director and Head of Portfolio Management (SA), MitonOptimal