MARKET PERFORMANCE

December was a great month for equities, driven by bullish fundamentals and sentiment. The S&P500 ended the year up 31.5% in USD and the All Share closed up 12%. The JPMorgan Global Manufacturing PMI jumped into expansion for the first time in six months, driven by a supportive monetary policy. Looking into 2020, a recession looks unlikely. The US and China finally agreed to a phase-one deal and the UK’s Conservative Party achieved a majority victory, reducing the likelihood of a no-deal Brexit. China and India are expected to provide 55% of global GDP growth in 2020. Fiscal and monetary stimulus in both countries remains high and should support this growth. However, escalating tensions between the United States and Iran and a looming impeachment trial is keeping markets off-kilter.

The economy contracted by a shocking 0.6% in the third quarter, and Eskom reached a new low, implementing stage 6 load shedding and operating at a meagre 60% of capacity due to heavy rains, unplanned outages and possible sabotage, sending the economy and markets into a panic. Steps in the right direction are being taken, however, as Public Enterprises minister Pravin Gordhan announced that Eskom power stations are again drawing their fuel from nearby coal mines offering preferential prices – during the years of state capture, politically connected mines were preferred. The ANC also announced that they are in talks to introduce equity partners at SOEs, provided that government remains the majority shareholder. The government placed SAA under business rescue to allow a “radical restructuring” under which it will receive R4 billion. Inflation came in at a depressed 3.6%, its lowest rate since December 2010, still with no further rate cuts, driving SA real yields to amongst the highest in the world and constraining growth.

The SACCI business confidence index fell to 89.1 points in August, the lowest level since April 1985. The Chamber noted that the “current state of fiscal deficiencies, social injustices and unemployment necessitates an urgent adjustment”, and Moody’s noted that Eskom’s financial position remains a significant threat to economic growth and government debt levels. However, the agency acknowledged that progress would be slow, offering South Africa a temporary reprieve from a sovereign downgrade for the next 12 to 18 months.

The 2010s saw the longest expansion in US history, a decade without a recession. The S&P500 closed the decade near an all-time high despite US House Democrats delivering two articles of impeachment against President Trump, for abuse of power and obstruction of Congress. The process will now shift to a Senate trial, where he is expected to be acquitted by the Republican majority there. The Federal Reserve maintained the Federal funds target rate range at 1.50–1.75%, but the “dot plot” witnessed a downward revision to 2020 projections, with participants now expecting interest rates to remain steady. This, together with continued quantitative easing and slowing growth, has kept the US dollar weak.
Chancellor Angela Merkel’s government suffered a defeat as her coalition partner, the Social Democrats, replaced vice chancellor Olaf Scholz with Norbert Walter- Borjans. Scholz expects the SPD to put forward a set of demands that includes abandoning Merkel’s balanced-budget stance to stimulate growth. At her inaugural ECB meeting as chair, Christine Lagarde reiterated that monetary policy would remain highly accommodative but noted that fiscal policy is the next tool that can be used. Sweden’s Riksbank became the first central bank to exit negative interest rates, the rates having been negative since 2014.
The Conservatives won their largest majority since 1987 under Margaret Thatcher, which should allow for easy passage of the Brexit withdrawal agreement, with the UK set to leave the EU by the end of January. Focus will then move to EU trade negotiations, which currently have a 31 December 2020 deadline. This deadline is unlikely to be met, however, as the EU/Canada trade negotiations took eight years to complete. His 80-seat majority should give Prime Minister Boris Johnson ample room to seek transition-period extension.
Japan announced a stimulus package amounting to 26 tn yen ($239 bn), including 13.2 tn yen in fiscal measures to boost real growth, of which 9.4 tn yen is new spending. The CBRT cut rates by 200 bps at its 12 December meeting. The Bank of Russia cut its key rate by 25 basis points as inflation slowed. India’s budget deficit is expected to be at 7% in 2020 to boost growth.

China PMI data surprised on the upside. The official CFLP manufacturing PMI rose from 49.3 to 50.2 in November, taking the economy into expansionary territory for the first time in seven months. In December, the index continued to expand steadily, at 50.2.

The CNH fell below the 7 mark as President Donald Trump signed off on a phase-one trade deal with China, averting the 15 December introduction of US tariffs on $156 billion of consumer goods.The terms also cut existing tariffs by 50% on $360 bn worth of Chinese imports in exchange for a boost in purchases of US farm products and enhanced protection of intellectual property rights. The deal is expected to be signed on 15 January. China started 2020 with a 50-basis-point reserve-rate requirement cut, which further buoyed markets. China’s budget deficit is expected to stay at a high of 6.5% in 2020.

FUND PERFORMANCE

Market uncertainty and weak investor confidence continue to drive low interest rates and quantitative easing.

October’s Medium-Term Budget Speech highlighted SA’s rising public debt levels and low-growth environment and was followed by Moody’s negative outlook downgrade on South Africa’s sovereign rating.

Locally, the last repo rate cut occurred in July 2019, with a 25bps reduction to 6.5%, as near-term inflation outcomes consistently surprised on the downside. Inflation came in at a depressed 3.6% in November 2019, its lowest rate since December 2010. This dynamic is driving SA real yields to being amongst the highest in the world and constraining growth, with our economy contracting by 0.6% in the third quarter.

The fund continues to perform in line with our expectations. Tempered returns due to excess liquidity and reducing interest rates are ongoing themes in the market. As we enter 2020, we expect the US to continue dominating headlines due to the impeachment hearings, trades wars, US-Iran tension and the presidential election, with no shortage of additional headlines from the UK (the Brexit-EU trade negotiations) and the EU (political pressures and fiscal stimulus).