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The Acorn Brief Vol.17 Issue 1 – February 2019 | The Valuator Group

The Acorn Brief – February 2019

TWINOAKS INVESTMENT MANAGEMENT (PTY) LTD
Volume 17 Issue 1 – February 2019


“To educate a man in mind and not in morals is to educate a menace to society” – Theodore Roosevelt

COMMENT AND OUTLOOK – 2019 Has A Better Start

Investors were quite relieved to see the end of 2018 which was a really poor year for global investment markets. All of the major stock markets around the world ended in negative territory for the 2018 year. The last quarter of 2018 was particularly bad for global markets as concerns about USA/China trade wars, rising interest rates in the USA, Brexit chaos and slowing growth in China and Europe took their toll. The JSE had a poor 2018 ending 11.4% down for the year and extending its very weak performance over the past few years during which the market has underperformed returns from cash investments.

Markets in Europe and the East were also positive in January.

2019 has started off in a better manner with an improvement across global markets in January. The decision by the US Federal Reserve to hold interest rates at current levels and the message that they would not raise rates further if circumstances did not warrant it, was taken as a sign that the current cycle of rising interest rates may have ended. This together with some good economic data and company results boosted the US markets. Markets in Europe and the East were also positive in January but the outlook for Europe is not a good one as growth has slowed to its lowest level in a long time particularly as a result of the economic slowdown in Germany. On the political front the Brexit deal uncertainty continues to cause concerns and in the US the Federal Government shut down caused by the standoff between President Trump and the House of Representatives was finally ended.

The Rand has had a very good start to the year and is one of the strongest performing currencies.

The JSE had a positive January led mainly by the resource sector and the banks. Retailers had a really tough time as the economic conditions in SA reflected in some of the earnings guidance they gave to the market. The Rand has had a very good start to the year and is one of the strongest performing currencies. It reached levels of just above R13.20 to the US Dollar and also gained against the Pound and the Euro. It has weakened a bit since the end of the month. Annualised inflation in SA fell to 4.5% in December from 5.2%. The drop in the fuel price was a significant contributor as was a slowdown in food price inflation. On the back of the drop in inflation interest rates were left unchanged at the January Reserve Bank MPC meeting.

It is a tough task for South African and ANC president Cyril Ramaphosa as he strives to keep a factionalised ANC united.

This is an election year and the political rhetoric and noise will increase as we move closer to the elections. It is a tough task for South African and ANC president Cyril Ramaphosa as he strives to keep a factionalised ANC united and at the same time tries to convince the investing world that South Africa is open for business and that there will be improvements in the manner in which the country is governed. Many South Africans and no doubt foreign investors, are shocked at the extent to which corruption has become entrenched in various parts of government. The Zondo Commission has been the most revealing but the investigations into the NPA and the PIC as well as the completed SARS enquiry, have all indicated widespread corruption at all levels of government. The cost of these corrupt activities is significant as it not only results in loss of money but it also means that less money is available for desperately needed essential services and maintenance of infrastructure. The private sector has been complicit in these corrupt activities and there must be accountability across the board where it is found there has been wrongdoing. R500 billion lost to the Treasury through years of corruption is being mentioned. That is a very significant number.

Eskom remains the elephant in room and has the potential to be a drag on the country and its economy.

There are however signs of progress on a number of fronts. The new head of the NPA has started her term of office and other key appointments in the security cluster have been made. Unpleasant as it is, the current investigative commissions are revealing a lot about what is wrong in government and this will be rectified. Much attention is being given to the state owned enterprises as they are a burden on state finances. New leadership and boards of directors are in place in most of them. Eskom remains the elephant in room and has the potential to be a drag on the country and its economy. Its debt at R419 billion is making its sustainability questionable yet South Africa cannot afford to have Eskom fail. It is now predicted to make a R20 billion loss for the current financial year. Electricity demand is down due to the weak economy so that is impacting its revenue yet if there was an economic revival in SA, Eskom would probably not be able to meet the demand for increased electricity supply. Its two mega power station projects at Medupi and Kusile are so significantly over budget and behind schedule that it is hard to understand how this has happened at what was one of the most efficient power utilities in the world. Sadly, corruption and inefficiency have been a significant part of Eskom’s decline, but for the future of SA it has to get fixed.

February should provide many insights into the near term outlook for SA through the State of the Nation address and the national budget speech. We hope we will not be disappointed.

Source: Twinoaks
the-acorn-brief 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.