Throughout 2019, the sentiment in South Africa was not great. In the first quarter, Eskom started with load-shedding. The second quarter was mainly focused on the national election of which the outcome was a fairly market-friendly one. But unfortunately, trade wars between the USA and China also came back in the news in the second quarter. The third quarter was not only complicated by further funding to Eskom, but Fitch also downgraded our credit rating. 2019 ended with a very poor Medium-Term Budget which forced Moody’s to cut our credit outlook to negative. There were also other negatives like a surge in emigration statistics, stage 6 load shedding and business confidence at 20-year lows. All this contributed to the expectation that South Africa will get downgraded to junk status by Moodys.
It is important to remember that sentiment doesn’t always impact market returns.
The Rand ended the year stronger against the US Dollar than it started. Opening the year around R14.40 to the Dollar, and moving to 15.50 around August, it ended the year at R14.00.
South African equities ended the year strongly, assisted by a strong performance from gold and platinum counters – a recurring theme in 2019. The All Share index gained 12.05% during 2019.
Local bonds also had a decent year, as investors took advantage of the attractive yields on offer relative to supressed yields in most major developed markets. The bond index returned 10.32%.
The return on local cash was 7.29% in 2019.
The local property sector still struggled and only returned 1.92%
Most global asset classes delivered strong returns in 2019, assisted by supportive monetary policy from major central banks, despite concerns around slowing global GDP growth. The MSCI World index increased by 28.4% in USD
The market is looking forward to the presentation of the budget next month by Finance Minister Tito Mboweni, with the hope for concrete plans from the government in order to contain rising government debt levels. The majority of market commentators believe that the budget won’t be strong enough and a downgrade by Moody’s now seems inevitable. The World Government Bond Index (WGBI) expulsion that will automatically follow a Moody’s downgrade may trigger significant capital outflows, though this is expected to have a short-lived impact on the rand and local bonds. Amid a bond-supportive global setting, local bond yields are very high relative to peers, given the fiscal weakness and risks. However, they remain attractive in the context of a global search for yield and fragile prognoses for competing asset classes.
Optimum’s view is that there will be some volatility around a downgrade. Bond yields might spike higher and the Rand will spike weaker. As with most things, we expect that the market will overreact and then settle down to a fair value over time.
Income fund exposure still offers great returns. The yield on these assets are in the range of 8% – 8.5%. It is slightly lower due to the interest rate cuts by the SARB, but one can still easily achieve a return above inflation without taking on unnecessary risk.
Our view on local equities is still bullish. Equity valuations are not demanding which normally leads to decent future performance. We believe that companies can grow their earnings in the range of 6% – 8% with a dividend yield of 4 – 5%. Without a rerating, one can expect a return in the range of 10 – 12% in the next year.
The MSCI World Index (Global Equities) PE multiple levels of 17.2x is one standard deviation above the 15-year average. This would warrant some caution, although markets can stay at relatively elevated valuation levels for extended periods if earnings growth is maintained.
Optimum, based on the above asset class views, believe that the next year can once again be a good year for our portfolios. We see value in several asset classes and based on history this leads to great performance for our clients. Unfortunately, these performances cannot occur on a straight line. However, we will continue to use every opportunity to optimise our portfolios.
By Francois Botha – Optimum Chief Investment Officer
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