Market overview

As we move into the final quarter of 2019 concerns around the macro environment continue to heighten. Not only is U.S economic growth showing cracks but Europe, Asia and LATAM remain mired in a lackluster growth dynamic with little pointing towards sustainable uptick in the environment. The economic data has deteriorated quickly, especially through the back end of the 3rd quarter. The U.S. consumer appears to be holding up well amidst a backdrop of full employment and gently rising wages but the high frequency data points to trouble ahead and the weakness in the manufacturing and now service sectors could feed into employment and then consumption. In the shorter term, the pivot from “Liquidity Drain” to “pause” and now into a full-blown rate cutting cycle and potentially a resumption in balance sheet expansion by the Fed, the ECB, Japan (who never stopped) and the Chinese fiscal action should provide sufficient liquidity to allow for a muddle along scenario for global markets. Regrettably, in our scenario work this environment is largely unexciting from a return perspective given the slowing global growth dynamics but is our highest probability scenario. Globally, we see muted returns in the short to medium term across the broad opportunity set. Growth assets likely face some headwinds and a little margin pressure but that is likely already in the price in many markets. As mentioned previously, the low rate environment continues, across the curve. We believe equity markets will continue to benefit from negative real rates and even in absolute terms are fair value but are broadly cheap relative to bonds. We see credit as largely having done as well as it could from a spread perspective. We remain less constructive on our domestic market. We have not been excited around SA equities for some time but our orientation toward the ZAR and SA bonds was positive and represented our predominant expression of risk taking over the last few years until two quarters ago, when we began moderating our positioning. We see little indication of any real action from Ramaphosa’s economics team and the lack of policy response from the Government in SA is hugely worrying. There is now simply not enough money. The declining tax revenue picture, poor employment figures and business confidence highlights SA’s lack of growth, Lack of competitiveness and its poor investment environment. The risk, amidst this policy paralysis, is that the lack of growth due to poor confidence becomes slightly more entrenched amidst the slower global backdrop and South Africa’s increasing fiscal fragility ultimately gives rise to spillover effects in credit, rates, the currency and equities. While our Government bonds look appealing from a valuation perspective, South Africa’s debt to GDP ratio is worrying. We believe the country is running out of room to maneuver as the debt burden ratchets quickly higher. The government is seemingly not prepared to either prioritize specific institutions, put forward clarity on stake sales or take some hard decisions around areas of expenditure. As a result, we feel the need to moderate our view around our favoured asset class (bonds) for a broader mix of exposures given the risk of a “negative watch” which would be customary, although not a requirement, ahead of a potential rating downgrade for our country by Moodys.