Around the globe, economic prospects remain favourable despite mixed data from the Eurozone and China over the last couple of months. Most of the readings of manufacturing PMI across most economies remain consistent with strong output growth for 2018. China is the exception with its softening in manufacturing data suggesting a slowdown in underlying demand over the course of the year. Bearing in mind that their economy (now the second largest in the world) is still growing in excess of 5% per annum (6.5% is the official growth rate), they remain a significant contributor to global economic output.
Real sector data aligns broadly with solid global growth for 2018. The outlook beyond that is less assured. While the IMF assumes an annual GDP growth of 3.9% over the next two years (compared to a long-term trend growth of 3.5% per annum), Bloomberg consensus forecasts hint at a loss of momentum in 2019.
A hurdle to global growth remains the protectionist policies of the US which are now clearly more than just rhetoric. This is the lesson from last week’s announcement that President Trump would sign an order imposing global tariffs of 25 per cent on steel and 10 per cent on aluminium. These tariffs are not that important in themselves. However, the rationale used to justify them, their proposed level and duration, the willingness to target close allies and the President’s statement that “trade wars are good and easy to win” must alarm all informed observers.
According to the Financial Times, the International Monetary Fund is right to criticise this plan. It will impose substantial costs, disrupt alliances, and surely lead to yet more costly protectionism, by the US and others. It is a product of a characteristic blend of self-pity (the world is mean to us) and bombast (we can easily bully others into submission). The result is likely to be further shredding of the fragile fabric of global trade. And this, in the end, could shock global financial markets.
RMB Global forecasts economic growth improving to 1.3% and 1.6% in 2018 and 2019 respectively, from an estimated 0.9% in 2017. Even though this is a significant improvement from last year, it’s off a very low base and well below the global growth rate of nearly 4%. The good news is that the three key drivers of South African economic performance – global growth, commodity prices and the real effective exchange rate – are all supportive of domestic growth. Due to low confidence locally and economic growth decoupled from global growth, the expectations for a recovery in consumer and business confidence mean, however, that local growth could return to historical levels in line with global growth.
Inflation is expected to average around 5% over the next two years and this could create an environment for interest rate cuts by the South African Reserve Bank (SARB). Despite downward revisions in both headline and core inflation, the SARB kept policy rates unchanged at 6.75% at their last meeting, citing risks from potential currency weakness should Moody’s, which has placed SA on downgrade review, downgrade the local currency to sub-investment grade. Fiscal policy, Moody’s downgrade, and the knock-on rand effect remain the biggest hurdles to interest rate decreases – something that our local economy so dearly needs.
February saw US stocks fall after US Federal Reserve Chairman Jerome Powell suggested that rate hikes may be more aggressive than expected. Bond yields soared after this statement which sent stock markets tumbling. Locally, positive sentiment surrounding Cyril Ramaphosa’s election saw SA Inc. stocks outperform while the strengthening rand led to the large, multi-national companies’ underperformance. Both local and global property stock prices declined considerably (although the reasons for their decline differed). Global property stocks fell victim to rising global bond yields while the SA Listed Property sector’s fall could be attributed mostly to the plummet of three large shares (Resilient, Fortress Income Fund B, and NEPI Rockcastle).
The rand continued to strengthen against most other currencies and this weighed on the performance of global holdings in South African portfolios. Over the last year, the MSCI World Index gained more than 18% in US dollar but only 6.5% in rand.
|Market Indices||28 February 2018|
|(All returns in rand)||3 months||12 months|
|SA Equities (JSE All Share Index)||-2.2%||17.4%|
|SA Property (SAPY)||-15.4%||-6.1%|
|SA Bonds (SA All Bond Index)||11.9%||14.3%|
|SA Cash (STeFI)||1.8%||7.5%|
|Global Developed Equities (MSCI World Index)||-11.4%||6.5%|
|Emerging Market Equities (MSCI Emerging Market Index)||-7.3%||18.2%|
|Global Bonds (Barclays Global Aggregate)||-12.9%||-4.3%|