TWINOAKS INVESTMENT MANAGEMENT (PTY) LTD
Volume 17 Issue 7 – August 2019
“Obstacles are those frightful things you see when you take your eyes off your goal ” – Henry Ford
COMMENT AND OUTLOOK – Uncertainty Returns
July was a mixed bag for equity markets with the US markets maintaining their positive momentum and reaching new highs during the month. The markets in Europe were mostly weaker with the UK market improving on the announcement of the appointment of Boris Johnson as Prime Minister. In Asia the Hong Kong and Chinese markets were weaker with Japan’s Nikkei having a small increase. In South Africa the JSE All Share Index dropped by 2.4% for the month. In the first few day of August turbulence returned to global markets and significant losses were seen in markets around the world. The primary catalyst for the fall in markets was a resumption of the trade tariffs dispute between the USA and China. It was started by US President Trump announcing a 10% tariff increase on a wide range of Chinese manufactured goods. The Chinese authorities retaliated by allowing the value of the Chinese Yuan to drop and at the same time stopping imports of US agricultural products by all Chinese state agencies. Just prior to this uptick in trade tensions, the US Federal Reserve had announced a 0.25% cut in interest rates which had been largely expected. However, what was not expected by the markets was the message that this was not to be seen as the beginning of a series of reductions in interest rates. The result was that the US Dollar appreciated and equity markets started to decline even before the trade tariff dispute escalation.
“Caution about a further US economic slowdown and its impact on the financial markets is warranted.
There are many mixed messages coming out about the state of the US economy and the sustainability of the positive market moves that have been seen this year. It is the best performing major global economy but there are signs of a possible slowdown and this is causing concern. In addition the recent rate cuts did nothing to normalise interest rate yields and an inverted yield curve remains in place. This is where short term yields are higher than long term yields and it is often seen as a precursor to a recession. There are very low levels of unemployment in the USA and wage levels are rising. The US Federal Reserve is trying to normalise inflation at 2% as part of a plan to keep the economy growing. They have also been cutting back on their quantitative easing policies which in turn has put a bit more pressure on interest rates. One of the key concerns is the level of debt that is on government and corporate balance sheets. US companies have been buying back their own shares at an unprecedented level using borrowed money. This has the effect of increasing earnings per share so company results look better but it also masks a slowdown in overall profitability. The transport and logistics sector in the US has been lagging the rest of the market for some time and this is a clear indicator of a slowdown in economic activity. Caution about a further US economic slowdown and its impact on the financial markets is warranted.
“The Gold price has risen as a result of recent uncertainty.
The Rand and other emerging market currencies have been hit quite hard by recent events The Rand has fallen from below 14 to the USD to a current level just below 15 to the USD. The British Pound has also been relatively weak against other major currencies as Brexit uncertainty escalates and new Prime Minister, Boris Johnson, grapples with the challenges around the terms of Britain’s departure from the EU. A no deal Brexit is going to cause further turbulence and uncertainty. He has appointed a cabinet of pro-Brexit ministers so there is not likely to be much leeway for a deal that may be less disruptive than no deal departure by Britain from the EU. The Gold price has risen as a result of recent uncertainty and is at its highest level in 6 years at USD 1 467 per ounce. The recent rally in oil prices has faded and Brent crude oil has fallen back to just above USD 60 per barrel.
“Prospects for growth are being held back by increasing levels of government debt.
Political uncertainty continues to dominate the headlines in South Africa as the country grapples with problems on a number of fronts. President Ramaphosa’s plans for a New Dawn are under attack from both inside his party and the EFF. Unfortunately the office of the Public Protector has been dragged into this politicking. It is hard to understand why there are these concerted attempts to undermine the efforts to restore proper governance in the country and even more importantly, to create an environment in which the economy grows and jobs are created. Perhaps it is the fear of a properly functioning state and the resultant consequences for those that have participated in the looting of state resources that is behind this. Whatever the rationale of those trying to prevent the country from moving forward, the real victims are those that are being deprived the opportunity to get jobs and decent service delivery. In addition the prospects for growth are being held back by increasing levels of government debt, particularly as a result of the financial support that is being provided to Eskom and other State Owned Enterprises. It is very hard to see how ratings agency Moodys can avoid downgrading South Africa in its November review but that may already be priced in by the markets.
Once again it has fallen to the courts to ensure that the laws of the land and importantly the constitution, are upheld by those in public office. This is a situation that has to be rectified but it will only be when proper governance is back in place.
Twinoaks Investment Management (Pty) Ltd (Twinoaks) is a FSB approved Discretionary Financial Service Provider – No 849. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Twinoaks has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. For any further information concerning this publication, please contact Twinoaks.