Markets are off to a strong start in 2020, despite persistent uncertainties. This is even more encouraging given that it is off a respectable 2019 performance across most asset classes. Granted, the S&P’s near 27% stood out given widespread fears of a recession, but even SA markets delivered CPI + 3% – 8% (outside of listed property) – remarkable given the stagnant economy.
The challenge this year for asset allocators will be what to make of foreign equity – specifically the US – with elevated ratings but still-subdued earnings growth. Markets pre-price fundamentals and equities are telling us the Fed’s insurance cuts, QE and ECB/China stimulus will pay off this year with stronger global growth. This could drag the SA economy along, making the 30% discount in SA equities versus global equities a compelling opportunity. Interestingly, 2020 is the year of the metal rat in the Chinese zodiac. So far only palladium is roaring (up 25% year-to-date – and we are only in week three), but better growth might spill over to other metals to further boost SA’s terms of trade.
It will be a bold call to underweight foreign equity from an SA perspective, but it might be a game changer if the valuation gap were to close.
In the interim, there was welcome relief in a unanimous MPC vote to lower the repo rate by 25bp to 6.25%. The market is pricing in more to come and let’s hope this is not derailed by the numerous risks on the horizon: the budget, Moody’s, WGBI, Section 25 amendment and expropriation without compensation, Eskom’s numerous tariff requests, and ongoing SOE bailouts.
Numerous pitfalls still pepper the global outlook: the Wuhan virus in China, Iran/Iraq/US tensions, Russia/Turkey/Europe dynamics, populism and protests, climate change, impeachment, and US elections.
But as we know, to get the return you need to take some risk.
Wishing you all a roaring 2020!
- Level 2 B-BBEE contributor
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