The year 2018 started off with signals of synchronised growth across the globe, instilling a fair amount of optimism in investors. But now, as we can almost touch the end of this calendar year, the mood has turned markedly cautious. We capture the main themes of 2018 that caused the outlook among South African investors to turn glum, and cover the conversations advisers need to have with their clients to make sure clients’ portfolios pull through this low-growth environment unscathed.
The year of trade tensions
Just as we thought the theme of synchronised global growth was set for 2018, international trade was disrupted by President Trump’s announcement of tariffs on imports – mostly aimed against China – in January. Nine months later the IMF revised its growth forecast for the global economy down for the first time in more than two years, citing escalating trade tensions and emerging market stress. Also in the course of nine months, the Yuan shifted from a two-year high to a decade-low.
Interest rates are slowly returning to normal
During the year it also became clear that developed markets are leaving the risks of a deflationary environment behind with the US, the UK and the EU all experiencing mild inflationary increases. The Fed continued to hike its federal funds rate, up from 1.25-1.5% at the start of the year to 2-2.25% at the end of the year, with the possibility of one more rate hike in December. As a sign that the Fed is close to overtightening, the US yield curve has started to flatten significantly – in the past a strong indicator of a potential US recession – and a development that might make the Fed more reticent to hike interest rates again in December.
World economies are diverging again
Partly as a result of Trump’s trade tariffs, lower tax rates in the US and more lenient fiscal policy the US economy has diverged from other economies and it is leading global growth in 2018. Many emerging markets are taking strain, particularly Argentina, which had to hike its benchmark interest rate to the highest in the world, and Turkey, whose eventful political year caused the Lira to hit a record low.
Times are tough for the SA consumer
South Africa kicked off 2018 with Jacob Zuma as president and initially after Ramaphosa took over the reins consumer confidence hit an all-time high. Then a technical recession set in (the first in nine years) and no certainty was reached around how land reform would be implemented. In general, 2018 was a tough year for the South African consumer, with persistently high unemployment, a VAT hike in April and petrol prices hitting a record high during the year. As a result, consumer confidence ended the year on a rather sombre note.
Record highs for international markets – until October struck
During 2018 several international stock markets, such as the S&P 500 and the Nasdaq, hit record levels. The Nikkei hit a 27-year high. Then arrived “red October”, which sent markets plunging worldwide, causing an estimated loss of $2 trillion across world markets.
The worst year for SA markets since the great financial crisis
Locally, an unusual number of businesses experienced steep declines in their share price – for diverse reasons, some relating to misrepresentation, some involving regulatory action, and some due to the perceived poor handling of a crisis. Steinhoff, the Resilient group, Aspen, Tiger Brands, MTN and Naspers (due to Tencent) come to mind, to name but a few.
Unsurprisingly, considering the challenging macro environment and individual companies’ struggles, the year-to-date index returns for 2018 have been disappointing. The FTSE/JSE All Share Index (ALSI) lost 12.3% on a total return basis. SA listed property (SAPY) performed even worse, losing 24.5%. Bonds gained 7% year to date and cash returned 6.6%. During the year the Rand weakened by 12% against the greenback and by 5.6% against the Euro.
The adviser-client conversation that’s needed now
Understandably, with year-to-date returns like the above, clients are deeply worried and finding it hard not to switch into money market or bond portfolios. That could, however, be close to the worst investment decision that they could make right now.
While clients remain invested, their negative portfolio returns remain “paper losses” and, at least for long-term investors, there are many years ahead to make up these losses and eventually be rewarded for taking on the risk of high-growth assets like equities and listed property. But should they cash in now, those paper losses are locked in forever – they become real losses.
When markets start running, they run hard at the start
This is not the first time that we experience a negative calendar year in local equities – and hence in many high-equity balanced funds too. There is no guarantee that history will repeat itself, but it’s worth noting that, in the past 20 years, every year of negative equity returns was followed by a year of double-digit returns.
Your role as adviser is crucial to convince clients to stay the course and make sure they don’t miss out on the next equity market recovery. When markets start running, they usually rally hard and it’s important to be in the market from day one to capture the upswing.