Economic Review from World Class Glacier, Partnering with TVC

 

On Thursday 16 November 2018, TVC sat down with our World Class Investment team at Glacier to review recent economic occurrences
and discuss how this impacts our clients’ portfolios.

What happened?

1. China-USA Trade War Continues

The U.S. has placed a $250bn tariff on Chinese goods and demands changes to terms of trade between the two countries.
China responded by imposing tariffs on $110bn worth of US goods.
U.S. President, Donald Trump, and Chinese President, Xi Jinping, will meet to discuss trade at the G20 summit in Argentina (30 November – 1 December).

Impact on South Africans:

South Africa, like other emerging economies, relies on a strong Chinese economy to stimulate our demand for raw materials.
The top three shares on the JSE (Naspers, Billiton, Richemont) rely on Chinese consumers.
China’s exports slowed down significantly, having a negative impact on South African Equities.

2. Emerging Market “Crash”

Emerging market countries like Argentina, Brazil, Turkey and South Africa are known to have high debt levels.
These debt levels have recently been adversely affected by the rise of U.S. interest rates that resulted in a strong U.S. dollar.

A country’s credit rating (creditworthiness) give investors insight into the level of risk associated with investing in that country.
The risk to a country’s credit rating can be limited by “strong balance sheets, domestic growth and supportive policy”, as indicated in a report by Moody’s on Thursday 15 November 2018.
Of the 41 developed and emerging markets covered in this report, the worst cases are Turkey, Argentina and China.
Political risk will play a big role in countries that are highly dependent on international financing.

Impact on South Africans:

The rise of U.S. interest rates has put the Rand under pressure.
Leaders in South Africa have pushed economic policies in recent years that delivered short-term political benefits while creating long-term economic weaknesses.
South Africa will need credible economic policies to increase economic growth.

3. Eurozone: Brexit Uncertainty & Trouble in Italy

Brexit negotiations are still on-going and there are no signs of the EU and UK coming to a resolution.
This is adding to the uncertainty and with uncertainty comes increased risk.
Italy, the eurozone’s third-largest economy and most indebted member, is refusing to comply with budgetary limits imposed by the EU.

The European Commission responded by rejecting Italy’s latest budget plans.
Italy’s government wants to spend more on social welfare and create economic growth, while the EU demands that Italy lowers its budget deficit.
The danger is that if the Italian government persists in running larger deficits, its borrowing costs rise to unsustainable levels and the country is unable to roll over its debt at an affordable interest rate.
An Italian financial crisis will adversely affect all countries in the eurozone.

Impact on South Africans:

The stability of the EU will impact the exports from South African to Eurozone countries. An Italian financial crisis can result in a decrease in demand for South African exports.

4. Volatility of Oil Prices

Oil prices increased sharply due to the implosion of the Venezuelan economy and the sanctions placed on Iran by the U.S.
Forecasts of oil price depend on the interaction between supply and demand for oil on international markets.

Anticipated lower future oil demand, along with rising stockpiles of crude oil, and production increases from Russia, the U.S. and Saudi Arabia, had given rise to fears of excess supply. 
These fears resulted in a recent drop in Brent crude oil from $86 per barrel (bbl) in October to $65,21/ppl on 15 November 2018.

Impact on South Africans:

South African petrol prices are impacted by the strength of the Rand and the volatility of oil prices. 
The recent drop in oil process could result in a R 1,50/liter petrol price cut according to Investec Economist Annabel Bishop.

5. South Africa

Finance minister Tito Mboweni delivered his first medium-term budget policy speech on Wednesday 24 October 2018.
Tax revenue growth projections, as well as GDP growth have been revised down.
This disappointed markets and credit rating agencies.
The continuous bailout of state-owned companies contributed to this downward revision.
SAA will receive another R5bn bailout.
SA Express will receive R1,2bn and the South African Post Office will get R2,9bn in new funding from the government.

Various government organisations and commissions are involved in the investigation of state capture in Jacob Zuma’s presidency.
The Zondo Commission of Inquiry claimed its first victim in the form of former Finance Minister Nhlanhla Nene, who resigned as member of parliament on 19 October 2018.
Minister of Home Affairs, Malusi Gigaba, was extensively questioned about the Gupta’s naturalisation at a parliamentary portfolio committee.
He also came under fire for his decision to give permission for Oppenheimer-owned Fireblade Aviation to operate a private terminal at OR Tambo International Airport in Johannesburg.
Gigaba also resigned as member of parliament on Tuesday, 13 November 2018.

On a positive note, President Cyril Ramaphosa’s investment summit was a resounding success.
This summit saw another R290bn pledge towards the five-year target of attracting $100bn in investments in the South African economy.
PwC estimates that these pledges will add some R338bn to SA’s GDP between 2019-2024.
The presence of Amazon and Alibaba at the conference were very positive indicators.

What are the experts saying?

Federal Reserve Bank - U.S. Interest Rates
Projected Fed Fund Target Rates

U.S. Interest rates are expected to increase with >1% over the next year.
This will put pressure on the Rand and the debt levels of SA.

State-owned enterprises (SOEs) - SAA & Eskom

Finding solutions to inefficient state-owned enterprises, like SAA and Eskom will be one of the main concerns for President Cyril Ramaphosa.
Investment experts believe that we might see a partnership between the private sector and state-owned enterprises.

Global Growth
Purchasing managers’ indices

Global growth is slowing down.
The EU is a concern for global growth forecasts.
However, the growth of the U.S. is still strong and might cause global growth to continue.
The U.S. unemployment rate is <4%, which is great for growth but could cause an inflation surprise.
To combat inflation, the Federal Reserve is likely to raise interest rates.

Global Equity
MSCI World VS MSCI Emerging Markets

Experts at Glacier expect a slowdown in the MSCI world total return matrix.
However, global risk assets are still preferred over global fixed interest.
Emerging markets prices recently experienced a drop and is expected to bounce back.
There is high return potential in these markets, but they come with high volatility.
Funds with aggressive to moderate aggressive risk profiles will start to increase their exposure to these markets.

Listed property
NAV of Listed Property

Listed property is currently trading at 10% below its value.
Fund managers with an aggressive to moderate aggressive risk profile will start to increase their exposure to this asset class.

What can you do?

Establish clear investment goals.
Sit down with a financial planner to formulate an investment strategy.
Understand how your strategy aims to achieve you goal – Then stick to it.

At TVC we manage our own wrap funds that consists of a combination of diverse funds managed by industry leading asset managers. We have quarterly meetings with specialist where we analyse these funds and make the necessary adjustments.

The benefits of investing in our wrap funds include:

Investing in funds at below retail cost
Investing in funds only available to institutions
Reduces risk through diversification of asset managers
Quarterly revisions of wrap funds by a professional investments team
Quarterly feedback on economic and political developments
Comprehensive revision on your portfolio with advanced analytics
Find below our latest fund fact sheets:

Give us a call 021 914-7480 or Send us an email to request a meeting to discuss your investment needs.

TVC Meeting - Financial Advice

 

References:

https://edition.cnn.com/2018/11/16/business/trade-war-us-tariffs/index.html

https://www.sygnia.co.za/our-company/news-insights/details/2018/10/31/don’t-panic-when-markets-crash.-here’s-why

https://www.cnbc.com/2018/11/15/us-china-trade-war-beijing-written-response-to-us-trade-form-demands.html

https://www.cnbc.com/2018/09/18/china-says-new-tariffs-on-us-goods-worth-60-billion-effective-sept-24.html

https://www.scmp.com/news/china/diplomacy/article/2173590/us-china-trade-war-more-tariffs-will-hurt-both-countries-wto

https://citizen.co.za/news/south-africa/2010878/sa-economy-caught-in-crossfire-of-trumps-trade-war-with-china/

https://www.cnbc.com/2018/11/16/emerging-markets-face-multiple-challenges-but-some-are-resilient-moodys.html

https://www.forbes.com/sites/kenrapoza/2018/09/10/this-emerging-markets-crash-is-getting-a-bit-over-dramatic/#718b545b2431

http://time.com/5388359/emerging-markets-crisis-meltdown-trump/

https://www.cnbc.com/2018/09/04/emerging-market-crisis-.html

https://www.washingtonpost.com/business/brexit-italy-trade-risks-piling-up-for-europes-economy/2018/11/16/e6890a9a-e9a3-11e8-8449-1ff263609a31_story.html?noredirect=on&utm_term=.42922b07d37e

https://www.bloomberg.com/opinion/articles/2018-11-18/bin-salman-trump-and-putin-control-the-oil-price-now

http://southafrica.opendataforafrica.org/infographics/yxptpab/crude-oil-price-forecast-2018-2019-and-long-term-to-2030

https://www.iol.co.za/business-report/economy/some-relief-as-petrol-price-may-drop-in-december-18121348

https://businesstech.co.za/news/finance/279527/the-2018-mid-term-budget-speech-in-a-nutshell/

https://ewn.co.za/2018/11/15/malusi-gigaba-resigns-as-member-of-parliament

https://mg.co.za/article/2018-11-06-gigaba-to-be-grilled-over-oppenheimers-private-terminal

https://www.fin24.com/Economy/ramaphosas-investment-conference-may-lead-to-165-000-jobs-pwc-report-20181114

Disclaimer

This article provides information of economic events/trends that occurred in the third quarter of 2018, as well as the opinions of expects on the impact of these events/trends.

This article is not intended to forecast any future economic/political events/trends.

The effect of these events/trends will be different on each investor based on their investment goals and existing portfolio.

Always consult a financial adviser when making investment decisions.

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