What to expect in 2018

And just like that, the year in which we learned to live with late-night Twitter rants by an American president, political missteps at home and record-high stock markets swiftly comes to a close.

To assist you discern what the coming year may bring, we have noted our predictions of what is likely to be keeping you on your toes over the next 12 months. Our best bets? India will grow, cars will fly, bitcoin will crash and you’ll be eating meat-free meatballs (and who knows, you might even like it).


Looking back on a year filled with surprises

Last year’s financial headlines were dominated by the prospect of tighter global monetary policy as international central banks started to reverse the artificially suppressed interest rates that were put in place a decade ago in response to the Global Financial Crisis. This year we expect central bankers to start acting more like, well, bankers. We expect they will continue to normalise global interest rates in response to the return of inflationary pressures. We think that commodity prices will continue to recover on the back of encouraging Chinese demand and balanced global supply. While the election of Donald Trump as US president undoubtedly escalated geopolitical risks, not least with an increasingly skittish North Korea.

 US markets hit record highs throughout the year on the back of Trump’s promise of tax cuts, infrastructure spending and the prospect of looser financial regulation. China’s economy also performed better than expected, fuelled primarily by easy credit and copious amounts of public investment. The strength of Europe’s recovery similarly took market participants by surprise, with the International Monetary Fund (IMF) predicting growth of 2.2% for 2017, the highest in a decade. Emerging markets also benefited from record inflows, primarily motivated by a global search for yield and the euphoria associated with the “risk-on” sentiment.

 

Global equity flows – South Africa ready for a change of tide

Source: IIF, SBF Securities. Note IIF estimates used for August and September 2017.

Regrettably, over the past year South Africa’s prospects appeared somewhat less upbeat, with the economy expected to have grown by around 0.8% in 2017. However, following the recent confirmation that Cyril Ramaphosa has been appointed in the top leadership spot during the widely anticipated 54th ANC elective conference, many South African citizens appear to have welcomed the news that the most controversial and economically destructive political leadership in the country’s democratic history will soon be coming to an end.

 

South African GDP growth significantly weaker than emerging market peers

Source: Momentum, International Monetary Fund (IMF), October 2017 database.

 Evidence of how quickly investor sentiment has changed can be sighted in the South African rand’s impressive gain of 9.5% from R13.59 to R12.30 versus the US dollar in the days following the December 2017 announcement.

While it has proven all too tempting for our most recent, statistically-challenged leadership to formulate a myriad of excuses to justify South Africa’s comparably lacklustre growth, the reality is that self-inflicted political missteps, the fostering of distrust amongst the private sector and the widespread perception of state corruption has significantly eroded appetite to invest amongst businesses. This has resulted in a growth rate well below that which is required to absorb the overwhelming 27.7% of citizens that are currently unsuccessful in their on-going pursuit of employment.

Suppressed economic growth, rising levels of unemployment, an unsustainable tax revenue shortfall and an on-going fixed investment recession by the private sector has proven painfully effective at deterring foreign investment and undermining the recommendations of global ratings agencies. Let’s hope that this particular leadership legacy is quickly forgotten.

In light of market commentators’ uniformly positive responses towards Ramaphosa’s recent victory, it is tempting to conclude that this development reflects much needed progress for citizens and investors alike. At face value the economic consequences are simple, improved investor sentiment, favourable price adjustments for SA Inc. listed equities, a stronger South African rand, weaker inflation and perhaps even scope for the South African Reserve Bank (SARB) to reduce interest rates further over the coming months.

Despite the Johannesburg Stock Exchange (JSE) recently recording all-time highs, the reality is that merely 56% of JSE listed shares were positive for 2017 prior to the ANC elective conference. Much like unit trusts that have benefitted over the past few years from their international exposures, dual-listed multinational companies such as Naspers, British American Tobacco, Richemont, AB InBev and several international mining companies have proven extremely effective at outperforming their uninspired SA Inc. peers, who found their fortunes linked to increasingly depressed South African consumers.

While the prospect of investment returns based solely on political probabilities has often proven elusive, the reality is surprisingly simple; the catalyst to galvanise a positive shift in sentiment can materialise instantaneously and in fact may have already begun. With a little good fortune, we may even be able to avoid an immediate downgrade of our sovereign debt to junk by Moody’s in the first quarter of 2018, assuming they will be willing to temporarily overlook our projected R50.8 billion tax revenue shortfall.

As we enter 2018, steadily rising international asset prices and diminishing volatility have become the norm, global growth remains robust, and a newfound optimism prevails in South African politics. Yet now isn’t the time for complacency. At Momentum we believe in the merits of a well-diversified outcome-based investment appoach regardless of what developments the coming year may bring.

Kind regards,

Steven Schultz
Head: Investments and Savings Marketing