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29 Jan 2019

The Year In Review 2017

In 2018, equity bourses varied from -4.5% in US dollars for the bellwether US markets to -14.2% for emerging markets. Commodity indices were lower and even global bonds showed negative returns.

The FTSE/JSE All Share Index fell 8.5% (-21.3% in US dollars) with several blue-chip stalwarts suffering heavy losses as the market de-rated companies that have exploited cheap leverage to make acquisitions. Nine ALSI 40 shares declined by more than 30% (of which six fell more than 40%). SA listed property stocks plunged 25.3%. In SA, only cash and the SA All Bond Index (+7.7%) produced real returns.

The global economy continued to deliver above trend growth as US corporate earnings were boosted by Trump’s early tax cuts. The US Federal Reserve reacted to persistent economic growth by raising interest rates in four quarter-point increments but tellingly reduced its outlook for the number of hikes anticipated in 2019. Developed market bond yields continued to rise, with the US 10-year yield surpassing 3.0% intra-year before softening on safe-haven buying late in the year.

Major market inflection points are often associated with elevated volatility and increasing concentration of returns in a few counters. This was reflected on the JSE with the FTSE/JSE All Share Index fluctuating more than 5% twelve times during the year while US market returns were initially concentrated in the giant US tech stocks.

The world’s central banks have signalled the end of the decade-long quantitative support by withdrawing liquidity from markets. Combined with rising interest rates and waning confidence as global trade tensions rose, support for ongoing market gains has steadily eroded. The remaining bulwark for the post global financial crisis bull market is earnings. But analysts’ projections for growth have been tempered as the one-off boost of Trump’s tax cuts works its way through the system and the economic outlook is increasingly murky.

South Africans welcomed with relief a new political order as President Ramaphosa moved to reverse some of the more insidious decisions made in the final stages of the Zuma era. Despite this positive political catalyst, the country slipped into two quarters of negative GDP growth. Business confidence languished amid political uncertainty while consumer spending was constrained by rising taxes, fuel prices and administered costs.

The rand weakened 13.5% against the US dollar on emerging market contagion risk following Turkish and Argentinian disruptions. Trade war escalation further exposed the vulnerability of small, open, twin-deficit economies to exogenous shocks. Severely stretched public finances limit the SA government’s ability to meaningfully stimulate growth, making anaemic private sector fixed investment crucial for growth.

Given the outlook, Foord’s multi-asset class portfolios reflected a more cautious approach, with equity exposure having been reduced early in favour of high-yielding, near-dated SA government bonds. Bonds were one of the few asset classes to deliver positive returns and they continue to offer an attractive real yield.

While many of the non-resource rand hedges underperformed, this foreign earnings stream should provide protection in a volatile currency environment. Caution remains the watchword, but the portfolio managers are vigilant for quality opportunities that will sustain long-term performance when the bears retreat.


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