South African assets performed well over the month of December as global economic sen..ment improved. The 10-year government bond (R2030) yield closed -19bps lower at 9.02%. The All Bond Index returned 1.9% over the month to bring the year to date return to 10.3%, while the All Share Index rose 3.3% to bring the year to date return to 12.1%. The Rand gained around 4.7% against the US dollar. Foreigners bought more than R6bn local bonds during the month.

Global equi..es were up 2.9%, improving the year to date returns to 25.2% while emerging market equi..es were up 7.7%, taking the year to date return to 15.4%. Sen..ment turned more op..mis..c and the outlook for growth improved as the trade tension between the US and China eased and Brexit tail risks declined. Global economic ac..vity data also improved sugges..ng the global manufacturing downturn may have bo..omed while consumers and the services side of the global economy remains healthy. Despite this improvement in the data the global central banks signalled that monetary policy will remain accommoda..ve for a prolonged period. The ECB is set to con..nue with asset purchases un..l infla..on return, the Fed remains on hold and con..nue to expand their balance sheet and the PBOC in China announced a further RRR cut early in 2020. This easing of financial condi..ons, reduc..on in geo-poli..cal risk and improving economic ac..vity should support risk assets over the medium term. However, there are risks that may escalate quickly. The tension between the US and Iran are building and although neither party would want a war one cannot exclude the poten..al for poli..cal miscalcula..on by one side.

In South Africa, the poli..cal and economic reforms are happening at a slow pace while opera..onal and financial challenges at Eskom con..nue to pose the biggest downside risk to the economy. Ongoing electricity load shedding will be a drag on growth and the country’s fiscal health. The World Bank has downgraded SA’s growth to 0.9% for 2020 and the risk of ra..ngs downgrade by Moody’s has risen to an almost certainty. Local assets are already reflec..ng a large por..on of the downside scenario, signs of any economic improvement remain absent. While fiscal risks remain on the horizon the SARB’s hands are ..ed when it comes to providing more relief via monetary policy, despite infla..on falling and surprising to the downside.

Equi..es: The outlook for global earnings growth has moderated but remain posi..ve. However, accommoda..ve central bank policies and low yields will con..nue to provide some support to equi..es. We do not expect a US recession soon and expect global infla..on to gradually move closer to target supported by higher input costs, including wages. It’s too early to get excited about local equi..es. We do believe that the domes..c economy will start to benefit from interest rate cuts and more economic reforms, but this will take ..me. We like selected local and global exposed cyclical assets with strong global earnings growth poten..al and companies with the ability to generate cash sustainably. We con..nue to find protec..on in gold and precious metal stocks and ZAR hedged assets.

Fixed Income: South Africa’s infla..on will remain contained over the next few months and infla..on expecta..on should decrease further. Given current weak economic ac..vity and balanced risk to infla..on 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 over the short term.
Currency: We believe the US dollar strength has stabilised. Given the poten..al for global growth to converge lower and Fed to remain on hold we believe the US dollar could weaken over the medium term.

Alterna..ves: 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 vola..lity and lower correla..ons amongst asset classes and securi..es will increase dispersion and lead to a more favourable environment for alterna..ve assets to perform.