TWINOAKS INVESTMENT MANAGEMENT (PTY) LTD
Volume 16 Issue 10 – November 2018


“I like the dreams of the future better than the history of the past” – Thomas Jefferson

COMMENT AND OUTLOOK – Halloween for Markets

October turned out to be the single worst month for global financial markets since the financial crisis of 2008/09.

There was a slight reprieve on the last day of the month but losses across markets in October were significant. In some markets it wiped out most of the year to date gains and in others it dragged markets further into negative territory for the year to date. The US markets, which have been the best performing global markets this year, saw monthly losses in the Nasdaq of 9.2%, the S&P 500 of 6.9% and the Dow of 5.1%. In Europe the German Dax was down by 6.5% and the French CAC 7.3%. In China the market was down 7.8%, Hong Kong 10.1% and Japan’s Nikkei 9.1%. In South Africa the JSE fell 6% and at month end was 12% down for the year to date. The cause of the sell-off is attributed to number of factors. Amongst these were concerns about increased trade war tensions between the USA and China, the prospect of further interest rate hikes and slowing growth in some economies. There has been a bit of a relief rally in early November and some of the October losses in markets have been recovered. Volatility will continue.

The oil price fell quite sharply.

There was a slight improvement in some commodities in October but the oil price fell quite sharply and Brent Crude is currently at 71 USD per barrel having been over 80 USD per barrel at one stage. Growth in the Eurozone slowed and concerns about Italy and its budget deficit continue clouding the outlook for that region. China has also slowed down but President Xi is actively seeking to overcome any impact that the Trump trade tariffs may have on Chinese exports. Economic growth in the USA remains healthy and unemployment continues to drop as more job openings are created as a result of the positive economic conditions. Inflation in the USA is still within the US Federal Reserve target range but as they have cited concerns about rising wage pressure and its impact on producer prices, they are likely to raise interest rates again in December. President Trump is openly opposing the US Fed when it comes to them raising interest rates but it seems that they are going to ignore him and adhere to theirmandate of price stability. The moves in interest rates are being closely watched by markets as it could be a catalyst for a slowdown in growth. The other concern when it comes to interest rates is the amount of debt on corporate and government balance sheets around the world and what the impact of rising interest rates will be on debt serviceability. The US mid-term elections have resulted in the Democratic Party taking control of Congress from the Republican Party with the Republicans retaining control of the Senate. This will impede some of President Trump’s initiatives which cannot be a bad thing and demonstrates that his support in the USA may not be as wide as it seemed.

The appointment of Mr Mboweni is a very smart move by President Ramaphosa.

South Africa has a new Finance Minister in Tito Mboweni after Nhlanhla Nene resigned following his testimony at the Zondo Commission about his interactions with the Gupta family. The appointment of Mr Mboweni is a very smart move by President Ramaphosa and the markets barely reacted to the change at this crucial ministry. Mr Mboweni was governor of the Reserve Bank for 10 years and was responsible for introducing inflation targeting in SA. He is well known and respected in financial markets but has a steep challenge ahead of him. He delivered the Medium Term Budget Speech which is a reflection on how the country is doing against the February budget targets. The outcome is not a good one but he did not shy away from confronting the realities that the country is facing and that is a good start. The ballooning government wage bill was highlighted by him as being on a non-sustainable trajectory and it will have to be curtailed. That is going to be a politically challenging undertaking. He also highlighted the issues with the debt burden being carried by state owned enterprises and suggested that greater private sector involvement in some of these entities may be needed. This is a significant change in approach to the problems of the SOEs. The Rand has recovered from the lows reached in late October and is now close to R14 to the USD and has improved against the Pound and the Euro. This is in part due to an improvement in emerging market sentiment but may also signal some increased investor confidence is SA in spite of the obstacles to growth that need to be overcome.

Dismissal of Tom Moyane as SARS Commissioner.

Another good news story is the dismissal of Tom Moyane as SARS Commissioner following his suspension earlier this year. The Nugent Commission was quite forthright in its recommendation that he be dismissed. Not surprisingly he is fighting his dismissal but the evidence against him in terms of how his leadership changed SARS from a globally admired revenue service to the mess it became, is clear and damning. It was also revealed that he was involved in planning the changes at SARS that led to its shortcomings, a year before his appointment. You have to ask how was that possible, but as the state capture skeletons continue to fall out of the closet, it is clear that a parallel state was created in South Africa to serve the interests of a few. The private sector was in a number of instances complicit in these activities. Those that were must also be held to account along with government officials.

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.