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Citadel's economic and investment outlook for Quarter 1:2019
Date: 22 April 2019 Category: Stock Market |
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In our continued efforts to give our readers a broad number of views, opinions and information we have decided to share the views of Citadel wealth management regarding their economic outlook as published in their quarterly update to investors, clients and readers
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Citadel's economic and investment outlook
Below we provide readers with the economic outlook as provided by Citadel, wealth management. For those who dont know Citadel. They wealth managers for the more affluent investors in South Africa. And they do provide excellent information for all investors as can be seen below. Please enjoy.
"2018 was indisputably a tough year for investors as fears over the possibility of a global recession sent markets into a steep decline, with all major risk asset classes ending the year in the red. However, the global economy not only avoided a recession, but actually achieved some sensible above-trend growth.
With this in mind, it’s fair to mark 2018 as “The Great Decoupling”, or the year that investor anxiety decoupled equity markets’ behaviour from relatively strong economic fundamentals and actual company earnings. There are essentially three key reasons for this crippling anxiety which, when combined, convinced markets in the latter half of last year that we were witnessing the beginnings of a possible global recession rather than the results of a normal cyclical slowdown. First, trade tensions between the United States (US) and China remained a source of market trepidation throughout 2018, reaching an apex towards the end of the year when figures from China showed that the economy had slowed more than expected.
A cautious and conservative response from the Chinese government in 2018 further convinced market participants that China would be reluctant to strongly stimulate its economy as had been done during the 2015 downturn, for example, which means a cooling of one of the stronger growth engines of the world. Next, in an environment where monetary policy has begun normalising, global debt levels, and specifically corporate debt, have continued to climb, reaching the highest levels seen in 50 years. This too has raised fears that after a decade of low interest rates and “cheap money” being lent to risky companies and governments, interest rate normalisation may place an added burden on the corporate sector going forward. Finally, the US Federal Reserve (Fed) has continued to hike short term interest rates quite aggressively despite signs that the global economy, and of late also the US economy, are slowing. The Fed raised US short term interest rates by another 25 basis points in December, bringing the total number of hikes in 2018 to four. However, while global leading indicators have continued to erode, reflecting a softer global economy, the market appears to have moved ahead of itself (by seemingly discounting a recession), as a global recession remains unlikely for the next 12 months at least. We would still need to see significant corporate margin compression, and the implementation of more restrictive monetary policy across the board (rather than only seeing isolated hiking in the US), before agreeing that a recession may be around the corner.
INVESTMENT OUTLOOK FOR 2019
Despite the headwinds gradually building in the global economy, there is a definite basis for cautious optimism as we head into 2019. The final global economic growth figures for 2018 are likely to come in at above 3%, while this year will likely see growth in the region of just below 3%, meaning that while growth may be slowing, companies should still be able to grow or maintain earnings. Economic fundamentals further suggest that we are not heading into a recession just yet, so there is no reason that the recent sharp equity market decline should extend into bear market territory. A number of global leading indicators, which we monitor closely, still suggest that the likelihood for a recession over the next two years remains below 40%. Finally, 2019 could be a better year than 2018 for emerging markets (EM), as the Fed’s announcement in December that it may take a more cautionary approach to hiking short term interest rates could support EM currencies through a possible softer US dollar later this year. Furthermore, concerns over Turkey have been somewhat resolved by the government’s decision to begin implementing fiscal policies aimed at averting another economic crisis, while the Brazilian presidential election outcome in October was also viewed as favourable for hopes of economic reform. Both these positive developments have buoyed global investor sentiment towards emerging markets in recent weeks. Adding to this a possible US trade agreement with China and the promise of further Chinese stimulus; conditions which might just create the perfect cocktail for emerging markets to outpace developed markets.
GROWTH SLOWING IN US, BUT MOST FUNDAMENTALS REMAIN SOLID
One of the key themes that has emerged from the US, and indeed the world, is the increasingly prominent role that politics is playing in economics. Following the November 2018 US midterm elections, the Democrats seized the majority in the House of Representatives while the Republicans maintained their hold over the Senate. This result inevitably meant that we could expect to see any new policy initiatives getting tied up in political gridlock – exemplified by the current longest-ever government shutdown in the history of the US. President Trump has been using the current government shutdown as political leverage. While the Democrats are willing to support other bipartisan funding legislation, President Trump himself refuses to sign off until the Democrats agree to fund the border wall between the US and Mexico that was one of the pillars of his presidential campaign. However, much like with his trade war, Trump is walking a very fine line, as the longer this impasse continues, the greater the risk that he will harm or anger his constituents, and hurt the economy. He will need to tread extremely carefully if he wants to stand for a second term (and be successful) going into 2020.
Political impasse aside, the US economy delivered growth of close to 3% in 2018, despite some slowing in economic activity in the last quarter of the year. Household balance sheets have remained strong, the labour market is tight and job openings are at record low levels, while the soft patch in housing, seen in the course of 2018, seems to be bottoming out which is yet another positive indicator of consumers’ financial health.
This said, market jitters and the decline in economic activity since October represents the first time since President Trump has been in power that he has had to deal with these types of headwinds. And while his initial response was to shift blame onto the Fed, he has since demonstrated more willingness to negotiate with China, realising that continued market fears and uncertainty over trade threats will negatively impact his ratings while also running the risk of alienating voters. He now has until the end of March to strike a deal with China that will support markets while still saving political face, and the final agreement will remain a source of great interest and conjecture over the coming weeks. Looking ahead to 2019, we expect US GDP growth of around 2.5%, supported by a robust consumer, rising real wages and some leftover fiscal relief from measures implemented by Trump last year.
The Fed is also quite optimistic about the US’s growth prospects, and announced that it would continue to hike interest rates for as long as the US economic recovery continued. However, it tempered this announcement by adding that it would also take the potential impact on global markets into consideration when making its decisions, which was also seen as a market positive. Currently, the expectation is that company earnings growth for 2019 will be more than 8% in US dollar terms, which should create a supportive environment for markets to recover from the low levels reached over the past few weeks. However, while markets probably overreacted to the possibility of a recession, when compared to the double digit corporate earnings seen over the past few years, it is clear that companies are seeing the impact of the cyclical slowdown in slower demand, productivity and trade. Given the relative weakness in global equity markets, however, if the Fed turns more dovish in 2019 and slows down the pace of interest rate hikes, it could extend the positive growth environment a little longer. This would place the dollar slightly onto the back foot again. Alternatively, if the Fed continues to hike rates aggressively and if other global challenges continue to linger, the US might lead the global economy into recession sooner than expected – although this scenario seems less likely at this stage.
HARD KNOCKS FOR EUROPE WITH WARNING SIGNS AHEAD
Unlike the US, Europe experienced a particularly difficult 2018, as slowing global trade and China’s decision against strongly stimulating its economy, coupled with slower emerging market growth, represented a significant setback for Germany (especially during the latter part of the year), both as a major global exporter and Europe’s largest economy. Despite this, the European Central Bank (ECB) announced in December that it would be ending quantitative easing and would start quantitative tightening over the coming months. However, the ECB is unlikely to raise interest rates in the current environment, and given the lack of progress in the European economy, investors can expect short term interest rates to remain on hold for the better part of 2019. The large interest rate differential between Europe and the US should thus remain favourable to the US dollar over the euro, and the euro will likely remain under some pressure in 2019. In more bad news for the European continent, economic growth is likely to slow even further given specific troubles such as uncertainty around Brexit, political disruptions in France, tensions between Italy’s populist government and Brussels, and the resurgence of nationalism in Spain.
Furthermore, the region’s political challenges such as the splintering of the European Union (EU) and rise of populism are likely to heat up even further as German Chancellor Angela Merkel steps out of her role over the next two years. Despite this, Europe should be able to achieve economic growth of around 1.5% this year. Slowing global trade and softer support from exports mean, however, that achieving this 1.5% growth rate will depend on Europe’s domestic consumers who have been strengthened by rising wages of 2.2% year-onyear, tightening labour markets and falling oil prices. Meanwhile, key risks for the region heading into 2019 include the possibility that Germany could enter a recession before the US if US-China trade tensions continue to weigh on global trade, and if China decides against significant stimulation. Additionally, French President Macron’s promise to increase fiscal spending, made in the wake of widespread protests, would boost France’s budget deficit to more than 3% – a level far higher than what the ECB deems appropriate. Europe will need to manage its political challenges carefully if it is to avoid the risk of countries such as Italy and France causing another European crisis as seen in 2013.
CLOUDS BUILDING IN THE EAST
Already a major global player (with China and other emerging markets contributing as much as 40% to global economic growth), the cyclical economic slowdown experienced by China in 2018 played a large role in stoking market fears in the latter half of the year Domestic retail sales growth fell to their lowest levels in 15 years, while industrial production fell to its weakest levels in three years, but the Chinese government – already concerned about high debt levels – has adopted (up to now) a more cautious approach to fiscal spending and monetary stimulation than during previous periods of economic weakness. Crucial to China’s outlook for 2019 will be the trade agreement with US, which is expected to be finalised by the end of March. However, given that it will be expected to make some trade concessions to the US, its government will be likely to implement some limited stimulation measures during the course of the year, such as the $125 billion rail project announced a few weeks ago. This said, China is not just waiting around in suspense for the outcome of its negotiations with Trump. The Chinese government has already explored new trade agreements with other global regions and should also play a major role in the newly formed Asian trading bloc. Despite these measures, however, we believe that the country’s economic growth is likely to slow even more than general consensus given the headwinds of US trade tariffs the slowdown taking place in its domestic economy, and the government’s reluctance to stimulate aggressively. We therefore forecast growth of around 6% in 2019, falling to below 6% over the next three years.
SA’S OUTLOOK FOR 2019: A STORY OF TWO HALVES
South Africa’s year ahead will be divided into two halves, namely pre- and post-elections. Pre-elections, the focus is likely to remain on politics rather than economics, with the usual political jostling and campaigning dominating headlines. However, the February Budget Speech will be key in assessing South Africa’s economic progress over the past year, as well as judging how well the ruling party and Finance Minister Tito Mboweni will handle the challenges of a rising budget deficit, falling tax revenue, an excessive government wage bill and poorly performing State-Owned Enterprises (SOEs). Thus far, South Africa has managed to satisfy credit rating agencies – especially Moody’s, which has retained its investment-grade rating for the country – through avoiding such populist measures as nationalising assets or proceeding with the nuclear deal, while taking the very unpopular step of raising the VAT rate from 14% to 15%.
However, this is an election year and it may prove more challenging to avoid similar moves. Mboweni will need to balance social deliverables with the very low growth environment, the poor tax revenue that it yields and avoid a deficit blowout in order to continually satisfy the ratings agencies. The country’s direction after the elections will depend on the election outcome. If the ANC wins back 60% or more of the country’s votes, representing a strong vote of confidence in Ramaphosa’s leadership, he will finally have the mandate needed to implement the policies necessary to boost the economy, and business and consumer confidence will likely rebound, which should be positive for financial markets. However, economic growth wouldn’t be expected to recover significantly even in this scenario, as these policies would take time to deliver results. We would therefore probably only see their real benefits a few years down the line. Add to this scenario the possibility that the US Fed hikes rates less than expected, the US and China reach a mutually beneficial trade agreement, and that China possibly takes the decision to strongly stimulate its economy, we could also see some welcome relief for South Africa, the JSE and the currency in the second half of the year.
However, if the ANC fails to achieve the desired result, we could see a repeat of 2018, with an economy slowly going nowhere, which could possibly place the currency under further pressure. With this in mind, we expect South Africa to achieve growth of around 1.2% in 2019, and given stable inflation rates and our muted growth outlook, the South African Reserve Bank (SARB) is unlikely to continue hiking rates during the course of this year. If, however, Ramaphosa and government are able to begin implementing the right policies, economic growth could rise to 2% over the next two to three years.
PREPARING PORTFOLIOS FOR THE YEAR AHEAD
Investors would do well to be cautiously optimistic, although still somewhat defensive moving into 2019. While we don’t foresee a recession this year, global headwinds will continue to build and long-term issues still remain. That said, the sharp sell-off in global equities in the final quarter of 2018 has opened some buying opportunities as valuations are now much more attractive than at the beginning of 2018, meaning that now is a good time to top-up equity portfolios rather than sell. Ultimately, however, we are heading further into the late stage of the economic cycle, which means investors can expect to see heightened levels of volatility over the coming year.
Multi-asset portfolios with a long-term, diversified investment strategy would probably be best positioned to manage the volatility that lies ahead, but investors could also consider adding defensive alternatives such as hedge funds, protected equities and equities invested in more defensive sectors and stocks to their portfolios. We still currently prefer global to local equities, as global growth is likely to outperform South Africa’s and most global companies are generating better earnings at more attractive valuations compared to their local counterparts. The opposite can be said for the bond market. While global bond yields are generally unattractive at current levels, the real yield offered by SA 10 year government bonds is around 4% – one of the highest in the world. Local bonds therefore offer relatively good value for most multi-asset portfolios, especially if they are included in tax-friendly vehicles such as Retirement Annuities (RAs) and tax-free investment plans. Local property experienced a grim 2018, but the sector’s troubles were mostly related to stock-specific issues within the Resilient stable rather than being the result of rising interest rates or a rise in vacancies, despite the local technical recession.
As a consequence, we believe that the sector warrants an allocation within multi-asset portfolios, offering investors a good opportunity for some additional diversification that should result in good returns over the longer term. Likewise, global property also offers attractive real yields and still has some allocation within our portfolios for yield enhancement and diversification benefits. Finally, we remain quite light in cash, carrying only as much in portfolios as clients need to meet their short- and medium-term liquidity requirements, as both local and global cash assets usually fail to achieve inflation-beating returns over the long term"
"2018 was indisputably a tough year for investors as fears over the possibility of a global recession sent markets into a steep decline, with all major risk asset classes ending the year in the red. However, the global economy not only avoided a recession, but actually achieved some sensible above-trend growth.
With this in mind, it’s fair to mark 2018 as “The Great Decoupling”, or the year that investor anxiety decoupled equity markets’ behaviour from relatively strong economic fundamentals and actual company earnings. There are essentially three key reasons for this crippling anxiety which, when combined, convinced markets in the latter half of last year that we were witnessing the beginnings of a possible global recession rather than the results of a normal cyclical slowdown. First, trade tensions between the United States (US) and China remained a source of market trepidation throughout 2018, reaching an apex towards the end of the year when figures from China showed that the economy had slowed more than expected.
A cautious and conservative response from the Chinese government in 2018 further convinced market participants that China would be reluctant to strongly stimulate its economy as had been done during the 2015 downturn, for example, which means a cooling of one of the stronger growth engines of the world. Next, in an environment where monetary policy has begun normalising, global debt levels, and specifically corporate debt, have continued to climb, reaching the highest levels seen in 50 years. This too has raised fears that after a decade of low interest rates and “cheap money” being lent to risky companies and governments, interest rate normalisation may place an added burden on the corporate sector going forward. Finally, the US Federal Reserve (Fed) has continued to hike short term interest rates quite aggressively despite signs that the global economy, and of late also the US economy, are slowing. The Fed raised US short term interest rates by another 25 basis points in December, bringing the total number of hikes in 2018 to four. However, while global leading indicators have continued to erode, reflecting a softer global economy, the market appears to have moved ahead of itself (by seemingly discounting a recession), as a global recession remains unlikely for the next 12 months at least. We would still need to see significant corporate margin compression, and the implementation of more restrictive monetary policy across the board (rather than only seeing isolated hiking in the US), before agreeing that a recession may be around the corner.
INVESTMENT OUTLOOK FOR 2019
Despite the headwinds gradually building in the global economy, there is a definite basis for cautious optimism as we head into 2019. The final global economic growth figures for 2018 are likely to come in at above 3%, while this year will likely see growth in the region of just below 3%, meaning that while growth may be slowing, companies should still be able to grow or maintain earnings. Economic fundamentals further suggest that we are not heading into a recession just yet, so there is no reason that the recent sharp equity market decline should extend into bear market territory. A number of global leading indicators, which we monitor closely, still suggest that the likelihood for a recession over the next two years remains below 40%. Finally, 2019 could be a better year than 2018 for emerging markets (EM), as the Fed’s announcement in December that it may take a more cautionary approach to hiking short term interest rates could support EM currencies through a possible softer US dollar later this year. Furthermore, concerns over Turkey have been somewhat resolved by the government’s decision to begin implementing fiscal policies aimed at averting another economic crisis, while the Brazilian presidential election outcome in October was also viewed as favourable for hopes of economic reform. Both these positive developments have buoyed global investor sentiment towards emerging markets in recent weeks. Adding to this a possible US trade agreement with China and the promise of further Chinese stimulus; conditions which might just create the perfect cocktail for emerging markets to outpace developed markets.
GROWTH SLOWING IN US, BUT MOST FUNDAMENTALS REMAIN SOLID
One of the key themes that has emerged from the US, and indeed the world, is the increasingly prominent role that politics is playing in economics. Following the November 2018 US midterm elections, the Democrats seized the majority in the House of Representatives while the Republicans maintained their hold over the Senate. This result inevitably meant that we could expect to see any new policy initiatives getting tied up in political gridlock – exemplified by the current longest-ever government shutdown in the history of the US. President Trump has been using the current government shutdown as political leverage. While the Democrats are willing to support other bipartisan funding legislation, President Trump himself refuses to sign off until the Democrats agree to fund the border wall between the US and Mexico that was one of the pillars of his presidential campaign. However, much like with his trade war, Trump is walking a very fine line, as the longer this impasse continues, the greater the risk that he will harm or anger his constituents, and hurt the economy. He will need to tread extremely carefully if he wants to stand for a second term (and be successful) going into 2020.
Political impasse aside, the US economy delivered growth of close to 3% in 2018, despite some slowing in economic activity in the last quarter of the year. Household balance sheets have remained strong, the labour market is tight and job openings are at record low levels, while the soft patch in housing, seen in the course of 2018, seems to be bottoming out which is yet another positive indicator of consumers’ financial health.
This said, market jitters and the decline in economic activity since October represents the first time since President Trump has been in power that he has had to deal with these types of headwinds. And while his initial response was to shift blame onto the Fed, he has since demonstrated more willingness to negotiate with China, realising that continued market fears and uncertainty over trade threats will negatively impact his ratings while also running the risk of alienating voters. He now has until the end of March to strike a deal with China that will support markets while still saving political face, and the final agreement will remain a source of great interest and conjecture over the coming weeks. Looking ahead to 2019, we expect US GDP growth of around 2.5%, supported by a robust consumer, rising real wages and some leftover fiscal relief from measures implemented by Trump last year.
The Fed is also quite optimistic about the US’s growth prospects, and announced that it would continue to hike interest rates for as long as the US economic recovery continued. However, it tempered this announcement by adding that it would also take the potential impact on global markets into consideration when making its decisions, which was also seen as a market positive. Currently, the expectation is that company earnings growth for 2019 will be more than 8% in US dollar terms, which should create a supportive environment for markets to recover from the low levels reached over the past few weeks. However, while markets probably overreacted to the possibility of a recession, when compared to the double digit corporate earnings seen over the past few years, it is clear that companies are seeing the impact of the cyclical slowdown in slower demand, productivity and trade. Given the relative weakness in global equity markets, however, if the Fed turns more dovish in 2019 and slows down the pace of interest rate hikes, it could extend the positive growth environment a little longer. This would place the dollar slightly onto the back foot again. Alternatively, if the Fed continues to hike rates aggressively and if other global challenges continue to linger, the US might lead the global economy into recession sooner than expected – although this scenario seems less likely at this stage.
HARD KNOCKS FOR EUROPE WITH WARNING SIGNS AHEAD
Unlike the US, Europe experienced a particularly difficult 2018, as slowing global trade and China’s decision against strongly stimulating its economy, coupled with slower emerging market growth, represented a significant setback for Germany (especially during the latter part of the year), both as a major global exporter and Europe’s largest economy. Despite this, the European Central Bank (ECB) announced in December that it would be ending quantitative easing and would start quantitative tightening over the coming months. However, the ECB is unlikely to raise interest rates in the current environment, and given the lack of progress in the European economy, investors can expect short term interest rates to remain on hold for the better part of 2019. The large interest rate differential between Europe and the US should thus remain favourable to the US dollar over the euro, and the euro will likely remain under some pressure in 2019. In more bad news for the European continent, economic growth is likely to slow even further given specific troubles such as uncertainty around Brexit, political disruptions in France, tensions between Italy’s populist government and Brussels, and the resurgence of nationalism in Spain.
Furthermore, the region’s political challenges such as the splintering of the European Union (EU) and rise of populism are likely to heat up even further as German Chancellor Angela Merkel steps out of her role over the next two years. Despite this, Europe should be able to achieve economic growth of around 1.5% this year. Slowing global trade and softer support from exports mean, however, that achieving this 1.5% growth rate will depend on Europe’s domestic consumers who have been strengthened by rising wages of 2.2% year-onyear, tightening labour markets and falling oil prices. Meanwhile, key risks for the region heading into 2019 include the possibility that Germany could enter a recession before the US if US-China trade tensions continue to weigh on global trade, and if China decides against significant stimulation. Additionally, French President Macron’s promise to increase fiscal spending, made in the wake of widespread protests, would boost France’s budget deficit to more than 3% – a level far higher than what the ECB deems appropriate. Europe will need to manage its political challenges carefully if it is to avoid the risk of countries such as Italy and France causing another European crisis as seen in 2013.
CLOUDS BUILDING IN THE EAST
Already a major global player (with China and other emerging markets contributing as much as 40% to global economic growth), the cyclical economic slowdown experienced by China in 2018 played a large role in stoking market fears in the latter half of the year Domestic retail sales growth fell to their lowest levels in 15 years, while industrial production fell to its weakest levels in three years, but the Chinese government – already concerned about high debt levels – has adopted (up to now) a more cautious approach to fiscal spending and monetary stimulation than during previous periods of economic weakness. Crucial to China’s outlook for 2019 will be the trade agreement with US, which is expected to be finalised by the end of March. However, given that it will be expected to make some trade concessions to the US, its government will be likely to implement some limited stimulation measures during the course of the year, such as the $125 billion rail project announced a few weeks ago. This said, China is not just waiting around in suspense for the outcome of its negotiations with Trump. The Chinese government has already explored new trade agreements with other global regions and should also play a major role in the newly formed Asian trading bloc. Despite these measures, however, we believe that the country’s economic growth is likely to slow even more than general consensus given the headwinds of US trade tariffs the slowdown taking place in its domestic economy, and the government’s reluctance to stimulate aggressively. We therefore forecast growth of around 6% in 2019, falling to below 6% over the next three years.
SA’S OUTLOOK FOR 2019: A STORY OF TWO HALVES
South Africa’s year ahead will be divided into two halves, namely pre- and post-elections. Pre-elections, the focus is likely to remain on politics rather than economics, with the usual political jostling and campaigning dominating headlines. However, the February Budget Speech will be key in assessing South Africa’s economic progress over the past year, as well as judging how well the ruling party and Finance Minister Tito Mboweni will handle the challenges of a rising budget deficit, falling tax revenue, an excessive government wage bill and poorly performing State-Owned Enterprises (SOEs). Thus far, South Africa has managed to satisfy credit rating agencies – especially Moody’s, which has retained its investment-grade rating for the country – through avoiding such populist measures as nationalising assets or proceeding with the nuclear deal, while taking the very unpopular step of raising the VAT rate from 14% to 15%.
However, this is an election year and it may prove more challenging to avoid similar moves. Mboweni will need to balance social deliverables with the very low growth environment, the poor tax revenue that it yields and avoid a deficit blowout in order to continually satisfy the ratings agencies. The country’s direction after the elections will depend on the election outcome. If the ANC wins back 60% or more of the country’s votes, representing a strong vote of confidence in Ramaphosa’s leadership, he will finally have the mandate needed to implement the policies necessary to boost the economy, and business and consumer confidence will likely rebound, which should be positive for financial markets. However, economic growth wouldn’t be expected to recover significantly even in this scenario, as these policies would take time to deliver results. We would therefore probably only see their real benefits a few years down the line. Add to this scenario the possibility that the US Fed hikes rates less than expected, the US and China reach a mutually beneficial trade agreement, and that China possibly takes the decision to strongly stimulate its economy, we could also see some welcome relief for South Africa, the JSE and the currency in the second half of the year.
However, if the ANC fails to achieve the desired result, we could see a repeat of 2018, with an economy slowly going nowhere, which could possibly place the currency under further pressure. With this in mind, we expect South Africa to achieve growth of around 1.2% in 2019, and given stable inflation rates and our muted growth outlook, the South African Reserve Bank (SARB) is unlikely to continue hiking rates during the course of this year. If, however, Ramaphosa and government are able to begin implementing the right policies, economic growth could rise to 2% over the next two to three years.
PREPARING PORTFOLIOS FOR THE YEAR AHEAD
Investors would do well to be cautiously optimistic, although still somewhat defensive moving into 2019. While we don’t foresee a recession this year, global headwinds will continue to build and long-term issues still remain. That said, the sharp sell-off in global equities in the final quarter of 2018 has opened some buying opportunities as valuations are now much more attractive than at the beginning of 2018, meaning that now is a good time to top-up equity portfolios rather than sell. Ultimately, however, we are heading further into the late stage of the economic cycle, which means investors can expect to see heightened levels of volatility over the coming year.
Multi-asset portfolios with a long-term, diversified investment strategy would probably be best positioned to manage the volatility that lies ahead, but investors could also consider adding defensive alternatives such as hedge funds, protected equities and equities invested in more defensive sectors and stocks to their portfolios. We still currently prefer global to local equities, as global growth is likely to outperform South Africa’s and most global companies are generating better earnings at more attractive valuations compared to their local counterparts. The opposite can be said for the bond market. While global bond yields are generally unattractive at current levels, the real yield offered by SA 10 year government bonds is around 4% – one of the highest in the world. Local bonds therefore offer relatively good value for most multi-asset portfolios, especially if they are included in tax-friendly vehicles such as Retirement Annuities (RAs) and tax-free investment plans. Local property experienced a grim 2018, but the sector’s troubles were mostly related to stock-specific issues within the Resilient stable rather than being the result of rising interest rates or a rise in vacancies, despite the local technical recession.
As a consequence, we believe that the sector warrants an allocation within multi-asset portfolios, offering investors a good opportunity for some additional diversification that should result in good returns over the longer term. Likewise, global property also offers attractive real yields and still has some allocation within our portfolios for yield enhancement and diversification benefits. Finally, we remain quite light in cash, carrying only as much in portfolios as clients need to meet their short- and medium-term liquidity requirements, as both local and global cash assets usually fail to achieve inflation-beating returns over the long term"
For more views presented by asset managers take a look at our daily investment update page in which we provide a daily update from PSG, or follow or weekly market wrap as provided by Peregrine Treasury services.