Global Market Overview – 2nd Quarter 2019
Global equity market returns were volatile during the quarter, dropping off significantly during May, only to make a near full recovery in June. Market volatility was primarily driven by macroeconomic factors and perceptions of uncertain futures not untypical of near end of bull market cycles.
Brexit in the UK and the ongoing US-China trade dispute were some of the main contributors, with announcements relating to these stories coinciding with big market price shifts.
Global fixed interest markets delivered higher than expected performance primarily due to talk in the US of reducing interest rates. The main influence on longer dated fixed income returns is interest rate movements and with most major central banks dovish, there was room for interest rates to drop thereby delivering capital gains during this quarter.
Global listed property had a relatively quite quarter after a very strong first quarter performance. Sustainable economic expansion is one of the biggests drivers of property performance. As the US continues to expand, albeit at a slightly slower pace, so does the US property market. Elsewhere around the globe economies are struggling to varying degrees and the outlook in this past quarter was less certain and is reflected in the numbers.
The uncertainty surrounding Brexit has arguably never been this high. During the quarter, the European parliamentary elections took place. Both the Conservative & Labour Party performed poorly, with a combined total of only 22.56% of votes, while the newly formed Brexit Party had a very strong result, drawing in 30.74% of the total vote.
Theresa May the British Prime Minister announced that she will step down as Prime Minister in July 2019. The contest for her position as the head of the Conservative Party has now been whittled down to two candidates, Boris Johnson the past Foreign Secretary or Jeremy Hunt the current Foreign Secretary. The result of this runoff is scheduled to be announced on July 23, 2019, with Mrs. May likely leaving the PM’s office officially the following day.
Both Boris Johnson and Jeremy Hunt have indicated that they would renegotiate the deal brought to the UK Parliament by Mrs May, although the EU Leadership has stated that they will not reopen negotiations. Mr Johnson has taken a firmer stance than his competitor on the issue of leaving the EU, stating that Britain under his leadership will leave the EU on the deadline date of 31 October with – or – without a deal.
The ride-hailing technology company UBER went public on 12 May 2019 in what was the most anticipated technology company listing in several years. Early valuations put market cap estimates at around $120bn, making it one of the highest pre-listing valuations in history. Closer to the IPO and due to various economic and business related factors, investment bankers Morgan Stanley suggested a IPO shareprice range of $44 – $50, putting its valuation at between $80 bn to $91 bn.
The Uber Board opted for a listing price at the lower end of the scale, and listed at $45 per share. On the first day of trading, the very first trade was locked in at $42, 6.7% lower than the IPO price, the losses then extended throughout the day to a close of $41.57, or a loss of 7.6%. These initial losses might have been attributable to Uber’s biggests competitor LYFT coming out with financial results just before the IPO and reporting just under a $1bn net loss for the year, a sobering reminder of what shareholders could expect from this sector.
UBER shares did eventually trade above the IPO price, resulting in a quarter end share price of $46.38, representing a quarterly return of 3.07%, perhaps vindicating the Investment bankers estimates.
The price of Brent crude oil fell by $1.03 per barrel during the quarter, a fall of 1.52%. From the highs during April of $75.6 per barrel immediately following the announcement by OPEC to further limit the supply of oil, the price was down 12%.
Increased volatility in the oil price was seen later in the quarter as US – Middle-East tensions mounted after events, such as an American oil tanker being attacked in the gulf of Oman and US-Iran conflicts culminating in Iranian forces shooting down a US drone. The closing price of Brent crude oil at quarter end was $66.55 per barrel.
Global Interest Rates
The US Federal Reserve, arguably the driver of global interest policies, held it’s target range for the federal funds rate at 2.25-2.5% but revised a promise to be “patient” in adjusting rates and signaled possible rate cuts of as much as half a percentage point, later this year. The policymakers left economic projections for growth and unemployment largely unchanged, but the US headline inflation was forecasted at 1.5% for 2019, down from the 1.8% projected in March.
By quarters end with revised non-farm payroll numbers showing strong growth in the labour market, the estimate for the rate cut has been revised down to 0.25%, from the initial estimate of 0.5%.
US- China Trade Wars
There is continued tension between the two largest economies on the globe. After negotiations between Trump and Xi Jinpeng broke down during the first quarter, the US raised tariffs from 10% to 25% on $200bn worth of Chinese imports, with China retaliating in kind by imposing tariffs on another $60bn worth of US goods.
The US had been planning tariffs on an additional $300 bn of Chinese goods, but at the June G20 summit in Japan, President Trump announced that these new tariffs would not be imposed immediately in an effort to rekindle trade talks. The two leaders will meet again early in July to try to find an workable solution to the trade conflict.
SA Market Overview- 2nd Quarter 2019
South African Equity markets followed much the same trend as their global counterparts, posting significant losses during May, only to recover strongly in June. South African bond market returns were fairly subdued during April & May however in June, fixed income yields fell sharply in line with a recovery in global risk appetite leading to another strong quarterly return.
The South African capital markets, as a leading and liquid emerging market, are volatile and are often used for trading the “risk on and risk off trades” globally. Investors disinvest (risk off) and invest (risk on) quickly from or into higher risk regional allocations such as emerging markets and invest/ disinvest in historically safe havens such as the US, Swiss, German and UK securities.
In the local and global capital markets worries persist about the SA Government credit worthiness especially in relation to its ability to fund the SOE’s and most especially ESKOM. Listed local property performance tends to have two primary drivers namely economic growth and interest rates. As SA has very poor economic fundamentals at the moment most recent performance in the sector has been more closely linked to interest rate movements and this is reflected in the quarterly returns. SA listed property posted a strong performance during April. May however saw a small pull back and June then recovered as long bond yields declined. Investor confidence in the asset class seems to have returned for now, as property experienced the highest quarterly return of all SA domiciled asset classes.
The year on year inflation rate rose to 4.5% during the quarter, slightly higher than analyst expectations of 4.4%, but still firmly in the middle of the SA reserve bank’s target range of 3-6%. The upward trend was mostly caused by faster price increases in housing and utilities (specifically water) and price increases in food & non-alcoholic beverages (the effect of new sugar taxes). Inflation slowed for transport, as fuel costs fell and for alcoholic beverages and tobacco.
Trading Economics Analysts project the inflation rate to hover around 4.7% one year out, with longer run models predicting an inflation rate of 4.6%.
General Election Results
The dust has finally settled following the South African general elections on the 8thof May. The official results were much in line with market expectations, with the exception of Gauteng, where many predictions had the ANC losing their absolute majority, while they narrowly held on with official results showing 50% for the party. The IEC announced the official results on 11th May with the 3 major parties performing as follows:
- ANC – 5%
- DA – 8%
- EFF – 8%
Even with the ANC losing ground from 2014 and the EFF performing well, the results were well received by the markets, with the Rand and SA bonds rallying on the day that the results were announced, the Rand appreciating 1.27% vs. the USD and the Beassa All Bond Index returned +0.98% for the day.
USD/ZAR Exchange Rate
The volatile ZAR appreciated by 0.66% over the quarter vs. the Dollar. Closing the quarter at R14.07/$, lower than analyst consensus expectations of R14.26/$. The Dollar traded at an average of R14.38 and is expected to trade at R14.84 in 12 months time by the analysts at Trading economics.
President Cyril Ramaphosa announced in his State of The Nation Address (SONA) that over and above the R23 billion p.a. for ther next 2 years already allocated to rescue the cash strapped utility company, a further R230 billion is also to be allocated to ESKOM over the next ten years.
The source of funding for the bailout is as yet unclear, but the likely path includes sovereign bond issuances and/or tax-hikes. Both options pose unique risks, both politically and financially. Tax funding is likely to be unpopular with both consumer voters and corporates, who are already enraged over the past and more recent loadshedding caused by Eskom’s mismanagement of the network and supply chain.
If funding is secured through sovereign bond issuance, it will put a heavy load on an already constrained fiscal situation. This added risk is already being priced in the market, with the premium of long term government debt over shorter term debt widening, implying investors weariness of the effect of Eskom on the long term sovereign debt path.
In all likelihood the funding will be sourced through a combination of these methods as well as some restructuring of government spending.