Anglican Church of Southern African

Market overview

Click to enlarge image
December 2017

While 2018 has been crowned as the 'year of growth' markets are already looking ahead to 2019 and what the future may hold. There seems to be a consensus among market participants that 2019 could be in for a shaky setting as the impact of U.S. stimulus fades. Other threats that pose a downside risk to the growth outlook for 2019 include inward-looking policies, geopolitical tensions, and political uncertainty in some countries.

President Trump's protectionist policies could be interpreted by markets as the first of many such risks to come. Rich asset valuations and very compressed term premiums also raise the possibility of a financial market correction, while the faster-than-expected increase in advanced economy core inflation and interest rates (as demand accelerates), could increase the list of financial vulnerabilities. Furthermore, the anticipated response of U.S. investment to the recent tax policy changes could turn out to be less than expected which may affect the external demand of U.S. trading partners.

Dollar weakness has impacted a host of other currencies. The U.S. dollar index weakened last year as the market repriced the U.S. economic growth fundamentals relative to that of the euro area. Furthermore, stronger emerging market (EM) currencies echoed the improved global trade and growth trends as well as investor risk appetite. EM equities have been inversely correlated with the U.S. dollar and if the greenback remains weak, it will provide a good backdrop for the MSCI EM index. Without a decisively weaker dollar, some of the tailwinds that EM equities and currencies have enjoyed in the past year may fade in the coming months.

China's economy is destined to slow down as housing and heavy industry's decelerate, which could dampen both Chinese equities (financials rather than tech) and weigh on the yuan (versus the dollar). Monetary tightening, tougher local government budget constraints and an unstable housing market are some of the factors that may lead to the deceleration of China's economy in the first half of 2018.

Commodity prices have been responding to the same signals of synchronised global economic expansion and global investment spending (in particular infrastructure) are expected to be strong this year. This should provide a boost to industrial metals. Nonetheless, the positive outlook may be challenged by China's slower growth as the main effect of a weaker Chinese economy will be that of softer commodity prices. In addition, should the U.S. dollar firm in the next few months, it could cause headwinds for industrial metals and commodity prices in general.

South Africa's growth outlook is likely to be impacted positively should the recent Ramaphosa-win (which restored some political certainty), lead to a sustained boost in business and consumer confidence. The South African Reserve Bank (SARB) has moderately upgraded the country growth forecast for 2018 and 2019. With that said, the central bank acknowledges that the growth outlook remains challenging and fragile, with the potential growth rate of 1.2% (as forecast by the SARB) remaining too low and uncompetitive relative to its peers.

Should the disinflation trend of 2017 gather pace, it could lead to interest rate cuts, consequently strengthening the growth pattern. Nevertheless, the SARB has identified the increase in international oil prices as an upside risk to inflation as well as the impact of possible further sovereign credit rating downgrades.

On the rating front, should the February budget sustain the estimates sighted in the Medium Term Budget Policy Statement (MTBPS) it is possible that the continuity could be interpreted as somewhat positive (mainly due to no further deterioration being predicted in the near term). This could lead to Moody's differing a potential downgrade. Even so, the medium to longer term fiscal trajectory will remain dire if there are no meaningful structural reforms, state-owned enterprise reform, expenditure restraint and/or if growth remains below potential.

The rand should remain relatively upbeat in the near-term should the outcome of the February budget speech be positive, growth and confidence surprise on the upside and a further credit rating downgrade be averted. Local political developments will also impact the rand considerably over the medium term. Should conditions in the local setting remain dire (in other words, no policy reform, a difficult political climate ahead of the 2019 national elections and/or little to no fiscal consolidation) while foreign investor interest in EM assets persists, it could further fuel volatility. Should foreign investor sentiment swing away from EM risk assets, it could impact the rand as it is a high-beta currency in a highly liquid financial market.

All content © Anglican Church of Southern African. All rights reserved.