investment note - Old Mutual Wealth

Dec 11, 2017 - wage growth and consumer inflation; large budget and current account deficits ... The services sectors saw slower but still positive growth of 0.3% .... 84.2. -2.08%. -2.99%. 43.84%. 38.17%. India. MSCI India. US$. 580.2. 0.78%. -0.48%. 29.80%. 27.23%. South Africa. MSCI South Africa. US$. 528.0. -3.12%.
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INVESTMENT NOTE 11 DECEMBER 2017

A DRAMATIC END TO A DRAMATIC YEAR DAVE MOHR & IZAK ODENDAAL, OLD MUTUAL MULTI-MANAGERS

11 DECEMBER 2017

WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE

particularly household debt, rising faster than incomes; accelerating wage growth and consumer inflation; large budget and current account deficits; and overvalued currencies. Unsustainably high commodity

A DRAMATIC END TO A DRAMATIC YEAR

prices are another indicator for countries like South Africa. These warning signs are largely still absent, except perhaps in China, a risk area that is constantly highlighted. The other big risk is that central banks hike interest rates quickly, perhaps spooked by ‘financial stability’ worries (to take away the punchbowl before the party gets out of hand, in the famous phrase of a former Fed chair). With Friday’s payrolls report showing 228 000 jobs created in November in the US, a Federal Reserve interest rate hike this week is a near certainty. The big question is really how quickly rates will rise next year, and how the US dollar responds. A strengthening dollar can cause havoc, putting emerging market currencies and commodities

The JSE was down sharply last week as scandal engulfed one of the

under pressure. The good news is that the Fed’s interest rate view is

biggest shares on the exchange. Steinhoff International shares plunged

based on an improving economy. The fall-out for the rest of the world

after the company’s auditors refused to sign off on its latest financial

is minimal and in such a scenario, rate hikes send a positive signal.

statements and its CEO resigned.

This was the case during the previous hiking cycle, which occurred

Before its collapse, Steinhoff was the seventh biggest company in the

against the backdrop of strong growth, and therefore had virtually no

FTSE/JSE Shareholders Weighted Index (SWIX), the benchmark widely

impact on financial markets.

used by professional investors, with a 2.3% weight. A number of other

ANOTHER POSITIVE QUARTER

listed companies closely associated with Steinhoff and Chairman

Locally, the economic outlook is also improving. The economy grew

Christo Wiese also suffered sharp declines.

faster than expected in the third quarter, with seasonally adjusted real

It is not immediately clear if outright fraud is involved, but German

gross domestic product increasing at an annual rate of 2% from the

prosecutors (the share is also listed in Frankfurt) said they are still

second quarter. The prior quarter’s growth rate was also adjusted

investigating possible accounting irregularities and fraud. Either way,

upwards from 2.5% to 2.8%. Growth for the first nine months of the

it is yet another blow to South Africa’s reputation for good corporate

year compared to the same period last year is at 1%, a run rate that

governance, coming so soon after allegations that a subsidiary of

is ahead of most forecasts.

Naspers, the biggest company on the JSE, improperly influenced

From a sector point of view, the third quarter benefited from a 44%

government policy. Meanwhile, listed technology group EOH also

jump in agriculture, a 6.6% increase in mining and a 4.3% rise in

saw its share price collapse last week following a probe by the

manufacturing. The services sectors saw slower but still positive growth

Independent Police Investigative Directorate (IPID) into subsidiaries that

of 0.3%, largely due to weak wholesale sales and declining government

do business with Government. In a country where the popular view of

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