House View Positioning Update

Global Economic Outlook

Global economic growth is steady, with the IMF forecasting 3.2% growth this year and next year. The US leads advanced economies, while the Euro Area remains a laggard, weighed down by Germany. Developing economies on the other hand are growing at a reasonable pace. India is currently the fastest growing economy, whereas slowing Chinese growth has prompted policymakers to ramp up economic stimulus. Global inflation has trended lower, and most countries are in line with their central bank targets. One exception is the US, where above-target inflation is proving sticky. A further worry is President Trump’s tariff policies could prove inflationary further down the line. Most central banks have cut their policy rates this year, but risks to the inflation outlook have caused the market to reassess how far interest rates are likely to fall in the current cycle.

Global Markets

Global equities have performed well this year, but the strong rand post the local election has tempered returns measured in rands. The MSCI ACWI is up 12% year-to-date in rands (to the end of October), with the US having been a key driver. Equity market strength has pushed up the valuation of the global equity index (US equities in particular) and our house view therefore remains neutral on global equities. Challenging our view is the argument that Trump’s resounding victory could well support continued US economic and equity market relative strength. Global bonds are down 4% in rands this year, and US Treasury yields are currently trading close to their 20-year high. We have therefore increased our global bond overweight, supported by reasonable valuations and the falling interest rate environment. Furthermore, global bonds offer defensiveness should economic growth surprise to the downside.

Local Economic Outlook

South Africa has experienced muted economic growth so far this year, but improved readings across various leading indicators, such consumer confidence, suggests a pickup is brewing. GDP data shows the South African economy stood still in Q1 and grew only modestly in Q2 (0.4% quarter-on-quarter), resulting in first half growth falling short of expectations. This is despite almost no loadshedding this year. With election uncertainty now out of the way, there could be some pent-up investment and spending on the way. Lower inflation, interest rate cuts, and the temporary boost from two-pot withdrawals should also boost economic growth. The US election outcome appears negative for global trade dynamics and specifically for emerging markets, but the potential impact on SA is difficult to gauge at this early stage. For now, economists still predict a modest pickup in domestic economic growth over the next two years to around 2%, though still below potential (2.5%). Inflation is currently 2.8% (October), which is below the SARB’s 3%-6% target band. This gives the Reserve Bank ample scope for further rate cuts.

Local Markets

The SA equity market is up 15% year-to-date (to the end of October) and is ahead of the MSCI ACWI. Economically sensitive shares such as banks and retailers have led the rally, further supported by a strong move in Naspers/ Tencent. Earlier in the year we increased our SA equity overweight, given attractive valuations and with the improved domestic outlook serving as a catalyst. Trump’s election has led us to temper our enthusiasm for SA equity somewhat, but it is still our preferred asset class to gain exposure to South Africa’s overdue cyclical recovery. SA Bonds have performed well this year, with the All Bond Index’s 14% rally almost on par with the JSE. In October and following the strong run (+26% over 12 months), we downgraded bonds to underweight. In our view, a fair amount of good news had already been discounted, and we remain doubtful the SARB will cut more aggressively than what is already priced in. We have become even more convinced post the US elections, which we suspect will weigh on EM sentiment and is likely to support dollar strength (i.e. rand weakness), both of which are negative for SA bonds. We used the proceeds from trimming SA bonds to increase offshore exposure at around 17.50 to the dollar.