US President Donald Trump’s extended honeymoon with financial markets is drawing to an end as jitters over his trade war with China knock confidence and evidence emerges that the spurt of growth triggered by sweeping tax cuts and a spending splurge is waning.
While US stocks have bounced back again, all three major indices – the Dow Jones, S&P?500, and Nasdaq – closed the first week of December more than 4% lower, marking the worst start to December since the global recession in 2008.
But the recovery is unlikely to last, with the outcome of a three-month truce on tariffs between the US and China still in doubt, and a growing number of analysts warning that the tide is turning in a bull market which has lasted for a decade – the longest in history.
The tariffs which Trump’s administration has slapped on imports from China and other countries has done more harm than good, with the US trade deficit in goods and services up by 11% in October compared with the same month in 2017.
If the trend holds, it will reach a record $600bn by the end of 2018, which would be 20% higher than when Trump took office.
Even worse, many US forecasters now believe that the economy will slip into a recession in 2020 – ironically, the year in which he will run for re-election.
Against this backdrop, many financial analysts are suggesting that local investors drop the idea that the US market is their best bet in 2019 and put more money into local shares, which offer better value – particularly as the dollar is likely to weaken in the coming months.
“Now is not the time to sell your balanced fund to take the cash and invest overseas – that would be jumping out of the frying pan into the fire,” Peter Brooke, head of MacroSolutions at Old Mutual Investment Group, said at a presentation on 4 December.
“We have brought money home and are running a little underweight offshore.”
There is consensus that the rand is undervalued, even after clawing back some of the losses it has endured in 2018, and many analysts believe that the currency could appreciate further in 2019, which would mute gains generated by overseas investments.
The dollar is expected to depreciate as US interest rise less than expected in 2019 in line with the country’s slower pace of economic growth.
But the rand’s status as a proxy for other emerging market currencies means that it will take a beating from any “risk-off” sentiment fanned by fallout from the trade war, and prospects of weaker global growth.
The UK’s inability to negotiate a smooth path to exit the European Union is adding to the turmoil in financial markets, which have also been wrong-footed by the political crisis in France, where violent protests have forced President Emmanuel Macron to scrap a fuel tax increase and ease other living costs for disgruntled French citizens.
Eskom holding the key
But the expected improvement in SA’s fortunes during 2019 may not materialise in the face of Eskom’s deepening financial and operational crisis, which looks increasingly likely to trigger credit rating downgrades and slow an acceleration in economic growth.
Fitch Ratings Agency said on 7 December that the government’s rumoured plans to absorb R100bn of the power utility’s debt would not in itself trigger a downgrade, but without a convincing turnaround strategy there remained a risk of further bailouts that would worsen the country’s deteriorating debt profile.
Those plans will only be announced at the start of 2019, and the looming general election towards May will limit the government’s ability to take the unpopular steps needed to get Eskom’s finances back in order – which include cutting its bloated workforce and sharply raising electricity prices.
Annabel Bishop, chief economist at Investec, said that she had cut her growth forecast for SA for 2019 to 1.4% from 1.9% because of structural weaknesses, which include Eskom’s inability to keep power supply stable and the risk which the power utility poses to the country’s finances.
Finding the budget
National Treasury’s budget speech in February will show how it intends to handle the crisis and is likely to be make-or-break for credit rating agencies.
Fitch and Standard & Poor’s have already given SA’s sovereign rating junk status, but Moody’s Investors Service could be forced to follow suit, triggering capital outflows that would weaken the rand, ignite inflation, and push the government’s debt service costs even higher.
The fallout could prompt the South African Reserve Bank to raise interest rates again in 2019, dampening the pickup in growth seen during the second half of this year.
“It’s really all about the budget in February – they won’t do an austere budget ahead of the election,” said George Glynos, managing director at Econometrix Treasury Management.
“It could happen a year later but by then the horse will have bolted – there will be downgrades.”
Apart from these seismic global and domestic events, asset managers say that there are two important trends that South African investors should keep in mind in 2019 – the importance of incorporating environmental, social and governance (ESG) standards and the growing influence of artificial intelligence (AI) on financial decisions.
Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.