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Trouble brewing?

28 March 2019 Jonathan Faurie

When commenting on the current economic climate, some investors have said that they will have better luck deciphering the current Eskom load shedding schedule then they will have predicting the performance of the markets.

When commenting on the current economic climate, some investors have said that they will have better luck deciphering the current Eskom load shedding schedule then they will have predicting the performance of the markets. 

Global markets have experienced a number of years of significant growth. While this is slowing down, there are opportunities for some investors to take advantage of this growth. However, a single global event can slam the breaks on opportunities. 

Interesting times

At the recently held Alexander Forbes Hot Topics seminar, Isaah Mhlanga – Executive Chief Economist at Alexander Forbes Investments – said that the world that we live in is becoming increasingly unpredictable and that opportunity can change into volatility very quickly. 

“2018 started with a synchronized economic growth story; US President Donald Trump then introduced a trade policy that put the brakes on a sustained period of globalisation. The imposition of import tariffs on vehicles, solar panels, washing machines, steel, and aluminium from China significantly affected the global economy,” said Mhlanga. 

In addition, the Argentinean and Turkish debt and currency crises spilled over into emerging markets which caused investors to question their investments in this space. Brexit negotiations and Italian fiscal problems increased risk in Europe which was often viewed as an investment safe haven. 

A year of downside risk

Mhlanga added that 2019 will be better than 2018 in terms of predictability; there will be a downside risk which will mainly be driven by political, policy and global uncertainties. 

“One of the key drivers of the market performance in 2019 will be slow economic growth. The Japanese, Chinese and Euro Zone manufacturing performance management indexes (PMI) have all dropped below the threshold that defines positive manufacturing figures. The US and the G4 manufacturing PMI’s are on a downward trajectory,” said Mhlanga. 

There is more worrying news coming from the US as 2019 will see a turn in the dollar cycle. 

"2018 was an anomaly which was induced by a US tax stimulus. The dollar has peaked and is expected to weaken going forward. A weak dollar supports emerging market economic growth; therefore, investors should be bullish about emerging market equities," said Mhlanga. 

Necessary stability

Mhlanga pointed out that there will be a lot of global stability when it comes to inflation rates. 

"There will be stable inflation rates across many countries which will be supported by stable currencies and still low oil prices. The pass through effects from weak currencies have halved over time," said Mhlanga. 

In addition to stable inflation rates, Mhlanga added that there is also good news on the interest rate front. 

"The US Fed reduced expected rate hikes from three to one. Fed funds pricing shows a 77% probability of no change in rates and a 23% probability of a cut by first quarter of 2020. Bloomberg analysts forecast a 40 basis point increase by the end of 2019 followed by a cut of 10 basis points to 2.80%. A 40 basis point and 75 basis point hike by the European Central Bank and the Bank of England by the end of 2020 will likely be postponed," said Mhlanga. 

Danger of uncertainty

The danger of uncertainty always exists. And if this is going to be the case in 2019, it will be driven by a few key factors. 

These include:

  • shifts in energy price dynamics and uncertainty on whether we can rely on oil as a positive supply shock;
  • global monetary policy normalization and the US dollar cycle;
  • tightening global financial conditions and implications for high deficit countries;
  • trade wars and supply chain disruptions; and
  • implications of global economic growth slowdown and China’s changing economic growth drivers. 

The local challenge

South Africa faces its own challenges in the form of the current load shedding crisis. 

Eskom has given assurances that the country is far from a national blackout yet are uncertain about the true state of the national power grid and what needs to be done to keep the lights on. 

Public Enterprises Minister Pravin Gordhan has said that he will keep on briefing the country regarding the crisis but has implored the country to be patient saying that there are no easy solutions to the problem. This suggests that we are in for a maintenance programme the likes of which has not been seen in South Africa in over 60 years. 

If load shedding persists leading up to, and beyond, the national elections on 8 May, will the African National Congress (ANC) maintain its stronghold on South African politics? Will there be major changes on the horizon in terms of the much sought after two-thirds majority? We may be facing our own political uncertainty, even if the ANC wins the elections. 

Editor’s Thoughts:
If change is so easily achieved, how can we predict how the market is going to perform? Even with assurances, can investors predict how the economy will perform in the coming year? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts

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