The Week Ahead

  • Hopefully, 2019 will be a better year for global equity markets than 2018

    The S&P 500 index is the US, the most useful indicator of large capitalization US stocks, experienced a roller-coaster ride in 2018. Starting the year at 2 696, it hit an all-time high of 2 930 on 21 Sep and then plunged to 2 351 on 24 Dec, a fall of 19.8%, before rallying strongly to close on Fri Dec 28 at 2 486, a drop of only 8% year to date. The market is full of opinions and it is difficult to discern what path the S&P 500 will take in 2019.

    But a few things in the ambient US economy are far more certain-for example the fact that the tax cuts that came into effect into 2018 have largely NOT been used for growth purposes within US companies. Instead, they have tended to be used for share buybacks by US companies, helping to push US equity markets to higher levels than they would normally have risen. Secondly, despite attempts by US President Donald Trump to influence US Fed Chairman Jerome Powell, the Fed is likely to continue hiking interest rates into 2019, albeit at a slower pace than was originally anticipated. Nevertheless, two more rate hikes of 25 basis points each can reasonably be expected in 2019.  Thirdly, the US economy is likely to begin cooling off noticeably in 2019, with the last two quarters of next year being especially weak. And then finally, and perhaps most importantly, Mar 2019 will mark ten years of the bull market in the US-the longest-lasting bull market in history. Even if it manages to eke out another positive year, it is unlikely to be profound, although a “blow-off” followed by a collapse cannot be ruled out.

    And all the while, trade tensions between the US and China persist, even though a type of temporary truce has been called. Looking at the S&P 500 as dispassionately as possibly, it is difficult to get enthusiastic about it in 2019. A continuation of the late December rally may well last into Jan 2019 but beyond that, nervousness and uncertainty are likely to creep back into the equation.  

    The JSE All Share Index (Alsi), in line with many equity markets globally, had a very poor year in 2018. For the year to 28 Dec 2018, it fell from 59 731 to 52 445, a fall of 12.2%. From its peak on 25 Jan 2018 at the height of “Ramaphoria”, it declined from 61 685 to 52 445, or 15%. Not quite a bear market, at more than 20% off its all-time high, but a poor market, nevertheless.

    One of the main reasons for the Alsi’s poor performance was the fall from grace of Naspers, which accounts for around 20% of the JSE’s total market capitalization. Naspers fell by 19% year to date, while it fell by 23% from its all-time high of R3 750/share on 23 Jan 2018.

    The gold mining index (J150), ended the year higher than where it started, although it tanked by over 30% during the year to reach a nadir of 912 on 20 Aug 2018. From that low point, it has risen over 50% to close out the year around the 1 400 level. Gold mining is extremely risky and is only for the brave, as the gold price for South African gold producers is determined not only by the US$ gold price but also by the USD/ZAR exchange rate.

    The South African economic outlook remains clouded by uncertainty and the general election slated to be held in May just adds to the uncertainty. The ratings agencies remain well-disposed to South Africa and, barring a major economic meltdown in the global economy, this country may yet be able to stave off a further slide into sub-investment grade status during 2019.  

    It is tempting to view the current market level as a buying opportunity, considering the large fall that the Alsi experienced last year. But a wholesale approach to investing in this market may not be as clever as a more selective approach, concentrating on those sectors and companies that are likely to perform in a slow-growing economy.

    The rand will probably have a profound effect on the direction of the market in 2019. Since Cyril Ramaphosa became president of SA, the currency has tended to move in line with other emerging currencies and has avoided the idiosyncrasies associated with the Zuma-era. Starting 2018 at 12.32 to the USD, the ZAR weakened by 24% by 4 Sep 2018, only to rebound to 14.43 to the USD by 28 Dec, which was a drop of 17% for the year. The Turkish lira fell by 83% during the first eight months of 2018 but rebounded strongly to finish the year “only” down by 39%. The Brazilian real dropped by 26% during 2018, bottoming out at 4.16/USD on 12 Sep 2018. It then rebounded to finish the year at 3.88/USD, a drop of 17% and very much in line with the ZAR.

    All other things being equal, the ZAR is likely to follow the same general path as other emerging market economies during 2019. However, the anticipated outcome of the general election in May will likely be critical for the currency. If the ANC fails to win a convincing majority and, by extension, Cyril Ramaphosa fails to tighten his grip on power within the organization, expect the currency to depreciate outwith the general movements of emerging market currencies. If, however, the ANC manages to get around 60% of the popular vote and Ramaphosa can thus exert far greater authority within the ANC, expect a meaningful boost to the currency.


    Companies reporting this month;                                                      

    15 Jan                                                            Resilient             Interim

    25 Jan                                                            AdaptIT              Interim

    31 Jan                                                            Arcelor Mittal       Final                                                                                                                                                                                                                                                                                                                                                 

    Economic related events this week;

    31 Dec                                                          SA Private Sector Credit Extension Nov, Trade Balance Nov

    04 Jan 2019                                                   Standard Bank PMI Dec