Taking a Look Back at the Third Quarter, 2018

In South Africa, low returns continue to be off-putting for investors, but the case for staying the course remains strong. On a macro level:

  • The SARB left the repo rate unchanged at 6.5% at both the July and September meetings. Many analysts believe that the MPC will keep the rates on hold in Q4 2018, in the face of relatively benign inflation pressure and weak growth.
  • The Rand, caught in the Emerging Market currency turmoil, had a volatile Q3-18. The USD/ZAR traded in a range from USD/ZAR 13.90 in July to a peak of R15.4 in September. The Rand then pulled back to R14.14 at the end of the quarter.
  • Inflation accelerated modestly in Q3-18 compared to Q2-18, averaging 5% from 4.5% the previous quarter.

Notably, the poor local stock market returns over the past month, quarter, year-to-date and three years could well be enough to cause many investors to switch out of equities or Balanced Funds into Income and/or Cash Funds.

Would this be the right move?

History shows that stock markets go through weak periods (also read Why Local Investors Need to Stay the Course, Despite Low Returns) and often, just as investors give up, the markets pick up. It is interesting to note that value manager Allan Gray has the highest allocation to SA equities in the Balanced Fund of all the big fund managers, along with Coronation. Both hold 45.3% of their Balanced Funds in SA equities. While the JSE has underperformed the US stock market hands down over the past three years, there is the possibility that it could play some catch-up in the next 12 months.

On the global front…

Equity markets registered strong gains over Q3-18. In particular, US earnings continued to surprise on the upside. Also, the market’s ability to shrug off concerns around interest rate rises and potential trade war rhetoric caught many economic commentators by surprise.  Many find the blind faith in the sustainability of profits in the developed markets uncomfortable. Indeed, the road forward is expected to be bumpy as investors try to get comfortable with higher interest rates – higher, in fact, than they have experienced for the last decade!

For the second consecutive quarter, Emerging Markets (including SA) underperformed their Developed counterparts.

Source:  MitonOptimal and Coronation