It’s time to shake off the anxieties of last year. I’m not being flippant: history is on our side. Since the 1950s, almost every year that the S&P 500 derated by more than 1 times, the average return the following year was 16% (on only two occasions was the return negative the following year).
We are aware of the returns that clients have seen and the general market conditions that we as investors face. NFB Private Wealth Managers are available and eager to engage with investors on your portfolios, or anything discussed below, whether through our review cycle or in an independent meeting.
We know there is some volatility about but we also know that there are meaningful returns to be had. Our best advice going into 2019 is that you keep a cool head and be patient. There are good reasons to stick to your investment plans and your rational asset allocation parameters:
- Global markets are about 30% cheaper than they were a year ago.
- Markets are acting with extreme risk aversion and are discounting an outcome worse than what will materialise.
- The annual compound return from the S&P 500 over the last four years is 4.4%, less than half the long-term average. This dispels the myth that we are at the end of a rampant bull run; there has been very little euphoria, with the market becoming progressively cheaper in recent years.
- The prospects for a positive 2019 are also improved by the sell-off in the last quarter of 2018. Emerging markets could outperform in this scenario which will be positive for SA.
- Many of the current headwinds we face can be addressed by political leaders, and they want economic growth as much as we do.
USD ZAR movements in the context of SA specific and Emerging Market FX dynamics
Source: Investec Wealth & Investment
Emerging Markets FX and ZAR movements in the context of global external factors
Source: Investec Wealth & Investment
In a nutshell, local and offshore equity markets went on a roller-coaster ride with significant pull backs and volatility. The massive number of positive and negative day moves across markets was extraordinary and unnerving. There were very few equity markets that avoided losses for the calendar year as depicted below.
Global equity markets, 2018 - all ended down
Source: NFB Private Wealth Management
This year we’re keeping an eye on significant events that will impact markets locally and globally:
- South African elections
With the election expected in May, the next few months are going to be dominated by politics. We expect the ANC to win, giving President Cyril Ramaphosa the green light to continue his reforms.
- US interest rate increases
Part of the Federal Reserve’s mandate is to prevent the US economy from overheating which would lead to inflation above target level. The Fed has hiked gradually and responsibly in line with growth conditions in the economy. However, Trump has stopped just short of blaming the Fed for poor market performance last year. It is not their mandate to ensure that equity markets rise. We think they will hike once or twice more (by 25bps each time) in 2019 and then wait for further signs from the economy.
The impact of Trumponomics and trade-related issues to date will be informed by the first quarter of 2019 (Q1) earnings.
Two-and-a-half years on it seems we are no closer to knowing what the outcome and the ramifications of Brexit are likely to be, but we will be watching with interest.
Several factors are likely to dictate equity market returns in 2019:
- South Africa
A key issue with the potential to impact the SA economy is inflation. We don’t think that it will rise as quickly as markets have been anticipating, providing some breathing room for SARS to slow or even stop the process of tightening interest rates. This will be good for businesses. December’s inflation figures are just out, and are already showing a slow down with a dip to a 7-month low of 4.5%. This is the mid-point of the Central Bank's target range of 3% to 6%. Add to this our expectation for some economic growth, albeit off a low base, and we may well find that the local business environment improves this year.
Another factor to impact growth will be the outcome of the 2019 election. If the ANC receives a relatively strong mandate from voters, President Ramaphosa will be emboldened to continue his reform agenda, which will be well received by markets.
The poor performance that we have seen both locally and globally in the last 12 months has resulted in markets being significantly cheaper on a valuation basis, representing some opportunity going forward. The JSE is currently trading on a forward price earnings (PE) multiple of below 12, which is significantly lower than long term averages. US markets are trading on around forward multiple of 14.5 times, which is lower than we have seen in the last 5 or 6 years, and is below the average PE of those markets since the Global Financial Crisis.
- US economic growth
While it is likely that the US economy will start to slow after the very strong growth we have seen over the last few years, it doesn’t mean that the world’s largest economy is going to stop growing. If you look at a whole host of data points, the US economy is still in good shape. Markets have potentially been overly pessimistic about growth prospects and any upside surprise will be a positive for markets.
- Trade war
The issue of trade wars has been a hot topic in the investment world and has acted as a massive source of uncertainty in markets. The impact of the issue is not yet known (the first quarter of 2019 earnings reports will be informative in this respect), and this uncertainty has been bad for markets. With Sino-US negotiations currently underway, more clarity should be forthcoming on the issue of tariffs which should be good for markets (that do not like uncertainty). With some luck, cool heads will prevail which will, in turn, be good for Chinese growth as well as for emerging markets (which in many ways were the collateral damage of 2018).
- Eurozone and Brexit
The quite unbelievable Brexit debacle has been another source of uncertainty for markets, and as stated before, this uncertainty has had a negative impact on markets and economies. Resolution to the Brexit issue – whether it is a hard Brexit (an event which we would like to believe is unlikely), a managed Brexit, or a U-turn on the matter (the potential of this event is not to be discounted given the recent lashing that the British Prime Minister received in trying to get her plan through parliament), the issue will come to a head soon. European markets have been pricing in a negative outcome, and if a positive outcome is achieved, this could act as a catalyst for a market re-rating.
2018 was a tough one, we believe 2019 will be better. Take perspective and stay the course with your initial investment decisions – chopping and changing now will do you no favours.