2019 Market Outlook

Market overview

Domestic equities delivered a poor return of -9,3% year to date with offshore asset classes, providing stellar returns due to the depreciation of the Rand exchange rate. Year to date, the return of most offshore asset classes in dollar terms has been poor and is indicative of a global low return environment. This performance can be attributed to a number of factors. There have been fears that escalating trade tensions between the US and China will dampen economic growth, particularly in emerging market economies. Country specific issues in Turkey and Argentina have led to general risk aversion towards emerging market economies. This has been exacerbated by weak domestic activity as tax increases, fuel price hikes and a high agricultural production base have led to lower than anticipated economic growth in 2018. The negative sentiment attributable to political uncertainty has continued unabated in 2018, despite the brief respite experienced at the start of the year stemming from a Cyril Ramaphosa victory in the ruling party’s elections. Although the current administration is expensing a lot of effort to halt rampant corruption and address the governance issues at state owned entities, the perception remains that not enough is being done owing to the ‘unity’ objective that is being pursued by the ruling party. This is unlikely to change until after the 2019 general elections. The above-mentioned issues are well known by the market. Dopfel (2010) shows that investors are unlikely to outperform their benchmarks when, after gaining an understanding of the prevailing economic environment, they then extrapolate the same environment into the future (myopic investing). In our research and analysis, we are therefore careful not to get overly carried away by the current negative sentiment. We believe that although history may not recur, it often rhymes. Our ‘quantamental’ research process uses quantitative strategies to search for historical environments that are similar to what we are experiencing currently, in order to ascertain the nature of investment returns that are to be expected over the medium-term. We analyse sentiment variables and fundamental macro drivers whilst identifying potential risks to our market outlook. This is a multi-asset approach recommended by Clewell, et al (2017) and Froot, et al (2014). Our analysis shows that investors should consider implementing low tracking error strategies, simply because global markets are faced with risks that are of an un-precedented nature, relative to history.