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24 Jan 2020

The Year in Review 2019

Global equity markets were buoyant in 2019, delivering the best calendar year return in a decade. This was a dramatic turnaround from the negative returns of 2018. The JSE’s mining stocks surged, but SA Inc. counters struggled. Portfolio manager MIKE TOWNSHEND looks at the year that was.

The bellwether S&P 500 Index in the US advanced 31.5% in US dollars last year (including dividends). The MSCI World Index excluding US markets rose by a more modest 21.4%.

The rally came after US Federal Reserve Chair Jerome Powell in January dramatically U-turned on the Fed’s policy of gradual interest rate normalisation. Three quarter-point rate cuts last year helped propel US markets to all-time highs.

Although markets surged, robust economic growth was elusive. The escalating US-China trade war imperilled global growth, now at its lowest level in a decade. The European Central Bank also launched new stimulus measures to support the bloc’s stagnating economy. The Bank of Japan’s massive quantitative easing programme continues.

British Prime Minister Theresa May resigned on Tory infighting amid Brexit malaise. However, new leader Boris Johnson later secured a convincing UK electoral majority, improving prospects of a quicker Brexit resolution. The UK and EU must now work even harder to prevent more Brexit economic damage in the world’s second-largest economic cluster.

Given this backdrop of slowing growth and elevated geopolitical risks, global corporate earnings grew by less than 5%. It was thus not earnings growth, but lower interest rates, quantitative easing and subsiding fears of a rapid slowdown that ignited investor confidence. US bourses were also supported by the tech behemoths and a recovery in cyclical sectors.

Turning to South Africa, the national election results were broadly as per expectations. The ANC retained its majority with a slight decline in support. The appointment of a new, nominally smaller cabinet was positive. But the ruling party is still plagued by factional tensions – frustrating President Ramaphosa’s ability to deliver much-needed reform.

Policy uncertainty and near-recessionary economic conditions persist. State-owned enterprises are in turmoil. Eskom implemented unprecedented Stage 6 load shedding in December and SAA was placed in business rescue.

South Africa’s debt-to-GDP ratio has deteriorated to uncomfortably high levels. Worryingly, Finance Minister Mboweni, in October’s Medium-term Budget Policy Statement, forecast no improvement within the next five years. South Africa is teetering on the brink of a Moody’s debt downgrade. All three major debt rating agencies may soon rate the country sub-investment grade.

Business and consumer sentiment is subdued. Wins for South Africa in the Rugby World Cup and Miss Universe contest brought much-needed but temporary gees. The rand also surprised, despite significant intra-year volatility. The currency advanced 2.6% against the US dollar on renewed emerging market sentiment after the US and China made eleventh-hour trade war progress.

The FTSE/JSE Capped All Share Index delivered 10.5% in rands and 13.7% in US dollars. Precious metals were particularly strong, especially PGMs. Palladium surged by 57.1% and rhodium by a dramatic 146.0%. Platinum advanced 20.6%. On the back of these price gains, the JSE’s platinum sector delivered a phenomenal 202.9% return. With the gold sector doubling, the resources sector’s 28.5% return dominated the bourse.

In contrast, financial counters rose nominally by 0.6% and industrials gained 8.9%. There was a wide dispersion within the industrial sector. Companies exposed to the local economy struggled. For example, general retailers declined by 18.7%. The large JSE-listed multinationals all gained more than 20%, in many instances reversing losses from 2018. The All Bond Index returned 10.3%.

Foord’s strategy to favour global shares and high-yielding, medium-term SA debt over SA Inc. shares was broadly correct. Being underweight resources counters was a performance drag. Many of the big portfolio holdings bounced strongly in 2019. Shares such as Capital & Counties, British American Tobacco, Naspers, Richemont and Anheuser-Busch posted double-digit returns.

Foord’s SA and global funds had a good year, with returns comfortably beating inflation and their respective benchmarks. With its low resources weight, the Foord Equity Fund was the exception. The long-term track records on all funds are excellent.

Looking ahead, global markets should drift higher on persistent monetary support and moderate growth, despite expensive valuation multiples and elevated geopolitical risks. South Africa needs urgent economic and political reform to prevent it sinking further into a growth limiting debt trap.


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