INVESTMENT NOTE 4 DECEMBER 2017
A NOVEMBER TO REMEMBER DAVE MOHR & IZAK ODENDAAL, OLD MUTUAL MULTI-MANAGERS
4 DECEMBER 2017
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
themselves whether the news is good (or bad) but whether the good news is priced in. Unfortunately, bubbles tend to burst only when many latecomers are sucked in by the lure of quick riches. Equity markets have been supported by favourable conditions on the ground. Global economic growth is accelerating, inflation is low (but positive) and the interest rate outlook is benign. The US economy grew 2.3% year-on-year in the third quarter, the fastest pace in two years (but still below the pre-2008 average of 3%). Surging equity markets, a recovery in house prices and plentiful jobs have seen consumer confidence rise to the highest level in a decade. Consumers also benefit from low inflation. The personal consumption inflation rate – the Fed’s preferred gauge of price pressures – slowed slightly to 1.6% year on year in October. Nominal wage growth remains sluggish though, and while this is one factor weighing on household spending, the absence of accelerating wages despite low and falling unemployment (4.1% in October) suggests interest rate increases will be very gradual. The Federal Reserve is expected to hike its key policy interest rate by 25 basis points in December, but it is the pace of increases next year and beyond that is crucial.
A NOVEMBER TO REMEMBER
Global equity returns are on track for a strong year. The MSCI All Countries World Index (Acwi), a broad index of developed and emerging market stocks, returned 1.98% in November to end the month at a record high level. With one month to go, the 2017 return is at 22.6% in US dollars. The index has returned 250% (or 15% annualised) from the lowest point of the global financial crisis in March 2009. Although investing in global equities over this period has been profitable, it hasn’t been a straight line. There was a bear market (according to the traditional definition of a 20% loss) between April and October 2011, while the 18% loss from May 2015 to January 2016 came close. Worries about the eight-year length of the rally are therefore somewhat misguided. At 16.2, the forward price:earnings ratio of the Acwi is slightly above the long-term average of 15.7.
Eurozone growth also accelerated to 2.5% in the third quarter, the fastest rate in six years. Confidence surveys show that businesses (across a range of sectors) and consumers are extremely optimistic about the economy, and suggests solid growth can persist. In China, credit conditions are tightening as the authorities attempt to rein in rampant lending growth and shadow banking activity. Corporate and government bond yields are rising and house price growth is slowing. However, November’s purchasing managers’ indices for manufacturing and services remained in solidly positive territory and support the view that China’s growth rate will fall gradually over time, instead of rapidly.
US listed shares account for about half of global equity market capitalisation. The S&P 500 returned 3% on the way to a new record high level. The US equity benchmark has returned 20% this year. The US is the most expensive with the forward PE of 19.8 above the longterm average due to the best uninterrupted run of the major markets.
ANOTHER POSITIVE MONTH ON THE JSE Local equities also had another positive month, even outperforming global markets in dollar terms. The FTSE/JSE All Share Index (Alsi) broke through 60 000 index points for the first time during November, but slipped below that level on the last trading day. Nevertheless, the Alsi returned 1.5% in November, including dividends and 21.4% for the year. The FTSE/JSE Shareholder Weighted Index (Swix) returned 3% in November, lifting the year-to-date return to 21%. The rally on the JSE has been driven by large-cap shares. The mid-cap index only gained 2.5% year-to-date while the small-cap index was marg