South Africa government bonds posted positive returns over September as the All Bond Index returned 0.5% over the month to bring the year to date return to 8.4%, while the All Share Index rose 0.2% to bring the year to date return to 7.1%. The Rand lost around 0.4% against the US dollar. Foreigners continued to sell local assets.

Global equities recovered almost 2% over the month after the -5% drop the previous month. The year to date global equities return increased to 15.7% and 3.7% for emerging market equities. Market participants remained concerned about mounting recession risk as global manufacturing data points to contracting economic activity. Non-manufacturing data has been resilient in the face of the ongoing trade war, but has also started to show signs of weakening along with softer labour data. Despite the softening, the aggregate level of employment and consumption remain consistent with continued expansion and central banks globally have turned more dovish to support the current economic cycle. Global economic and policy uncertainty continue to increase; as tension in the Middle East saw the oil price briefly spike more than 0% during the month, Trump faces impeachment and the China/US trade war continued to escalate.

We view the more recent contraction in manufacturing as a result of deteriorating business confidence and weak business investment. Political uncertainty will continue to weigh on industrial production and trade. US growth may slow to well below trend, but given the strength of the US consumer and services side of the global economy we don’t expect a US recession soon. We expect global central banks to cut rates and ease policy further. The Fed, ECB and PBOC is likely to cut rate again before year end and authorties are weighing up the need for more fiscal support in Europe and China.

In South Africa the data releases for Q3 suggest that growth may come in below 1% annualised for the quarter as business and consumer confidence continue to weigh on activity. We expect around 0.5-0.7% growth for 2019. Inflation data remains soft and may continue to surprise to the downside. However, despite low growth and inflation, we expect the SARB to remain cautious in cutting rates further. The SARB has expressed concern about the country’s fiscal situation and would first want to have more clarity around the Eskom restructuring plan, the medium-term budget outcomes and credit ratings downgrade risk before embarking on further policy easing.

Equi..es: The outlook for global earnings growth has weakened and has come under pressure from ongoing trade tension and softer global growth. However, accommodative central bank policies and very low yields will continue to provide some support for equities. Global equities may struggle rally over medium term as growth expectations reset. We do not expect a US recession soon and expect global inflation to move closer to target supported by higher input costs, including wages. It may be too early to be constructive on local equities, we do believe that the domestic economy will start to benefit from interest rate cuts and more economic reforms. We like selected local and global cyclical assets with strong global earnings growth potential and companies with the ability to generate cash sustainably. We continue to find protection in gold stocks and ZAR hedged assets.

Fixed Income: South Africa’s inflation will be well contained over the next few months and inflation expectation should decrease further. Given current weak economic activity and balanced risk to inflation the SARB may decide to cut rates again over the next 6 months but fiscal risk have increased meaningfully and may lead to a pause.

Currency: We believe the US dollar strength has stabilised. Given the potential for global growth to converge lower and Fed to cut rates we believe the US dollar could weaken over the medium term. We also view the ongoing trade conflict with China and uncertainty as dollar negative given the scope for lower real rates.

Alternatives: Going forward we believe global monetary policy will be more data dependent while global fiscal policies will be used to support growth. We believe higher levels of volatility and lower correlations amongst asset classes and securities will increase dispersion and lead to a more favourable environment for alternative assets to perform.