Key Themes for 2018

by | Feb 1, 2018

There is no denying that there is a big sense of new optimism after a bumpy ride through 2017 for local and global markets – 2018 started off with a bang since Cyril Ramaphosa’s election as the new ANC president spurred an inflow into South African markets while a weaker US dollar caused further emerging market inflows.

Since December 13, the FTSE/JSE All Share Index has gained 7.41%, while other equity markets across the world have also surged such as the S&P 500 and the FTSE/JSE All Share Index breaching new record highs.

Below is our view of some key themes that lie ahead for 2018 as we embark on another year of investment success for our clients.

“The Cyril Effect” & the “Davos Dream team”

A Strong boost in investor/business confidence following Cyril Ramaphosa’s election as ANC Party President has spiked growth and an inflow into SA bonds, driving bond yields down. So far we have seen strong rand appreciation and share prices of domestically focused businesses doing well with the JSE dipping at first but now at levels over 61,000 points.

It is still unclear how this will play out from a political and economic policy point of view in 2018, but what we can see is that markets are a lot more confident after the South African “DAVOS Dream team” went to showcase our local economy for increased investor confidence.

The key aspect is addressing anaemic economic growth and developing a reasonable fiscal plan so as to potentially ward off further credit downgrades. Positive developments in this space should see healthy appreciation in local asset prices, including the rand. Within a modest inflationary environment this would mean healthy real rand returns.

Synchronised Global Growth

Global Markets continue to ooze investor optimism, supported by a robust economic backdrop within major economies where global growth continues to be supported by China’s growth trajectory which is well over 6% now. Europe, India and other emerging markets such as Japan have also showed positive growth rates, which has caused good flows toward emerging indices.

There are generally three phases of global growth according to Investec Asset Management – “The first phase was when global markets rerated in anticipation of growth coming through, in an environment where interest rates were very low, and central banks were being very accommodative. Although very late in the cycle, phase two (which we are in now), is where earnings start coming through to justify the high market levels we see now. This in theory then leads to the third phase where confidence will start coming through and potentially drive further capital spending”

The fourth and final quarter of 2017 left risk-taking investors feeling overwhelmingly upbeat as they enter 2018. Healthy economic and company-driven data is widespread and continues across most of the key markets.

This has pushed valuation metrics such as the cyclically-adjusted price/earnings ratio to new highs, with the U.S. currently at the highest level since 2000, and before that 1929. which means the US is expensive and has been for some time now.

US Economy

Global Investor sentiment and positive market movements have been buoyed by the low interest rate environment in the developed world for a long time now. With the US rate hiking cycle underway after Quantitative Easing has stopped, there are 3 additional rate hikes that are forecast for 2018 which means rate hikes could be a threat to the cyclical upswing in progress.

Tax reform (at least for now) in the US is expected to provide a temporal boost to economic growth reinforcing bullish mood with the expectation of higher profits. The big question is how long will this last – What goes up, must come down.

Crypto Pressure

With legislation coming from every corner and Facebook now banning the advertising of cryptos on their pages, Bitcoin and other digital currencies have come under a lot of pressure as it now sits at $9,817 which equates to a fall of 31% this month, this is further to its fall from grace of $20,000 prior to December 2017– No investing idea had attracted more attention in 2017 than cryptocurrencies, the surges were accompanied by no shortage of pessimists calling a bubble due to the uncertainty of  where the crypto market will end up as well as the increasing costs of electricity needed to run digital currencies. The future is still very uncertain to what will happen in this space.

Optimistically Cautious

Although we have this view most of the time, we are still expecting a bumpy ride. After a long Bull market run across various global markets since 2008, we still caution investors of getting too caught up in positive sentiment. With our current managers we are always finding opportunities in both the local and global space. However, nobody can predict how much further markets can run, which is why we stay diversified across all our portfolios.