This year, global markets have been volatile and domestic developments have been both encouraging and painful.
The volatility in markets has been driven largely by chaotic and inward-looking global trade policy, which weakened growth in trade volumes, business confidence and fixed investments, and subsequently weakened economic growth in several key economies.
Locally, the economic reform efforts under way, though they look slow, are encouraging, but the rising unemployment and lacklustre economic growth are painful and will remain so for at least the next year or two.
More recently, the strike at SAA and appointment of a CEO at Eskom have sparked national debate, which is healthy as long as there is forward movement. Finance minister Tito Mboweni said it well in a tweet that read: “Rock the boat! Shake the baobab tree! Do the unusual, disrupt the comfort zones. Get things moving. Irritate the establishment! Let them think! That’s how you get moving forward. This country needs movement. Disrupt, destruct inertia.”
Different pockets of the market are all saying the same thing to investors: prepare for Christmas with open hands and don’t be overly defensive
Whichever way the dining room debates go, the outcome in the SAA and Eskom boardrooms must be good for the country. Fixing these two must be SA’s priority, and they are not nice-to-do exercises.
In the midst of all these developments locally, we who watch markets must not be consumed to the extent that we miss emerging market trends. We know December is normally a good month for global markets, and the stars seem aligned for a good Christmas present for investors.
Global market sentiment has improved over the past few weeks and risk appetite is rising. Global equities, both developed and emerging markets, are in positive territory over the past month. Global bond yields have ticked up. Emerging markets currencies have strengthened and credit default swaps have declined across the board, except for SA, for obvious reasons given our increased fiscal risks.
Different pockets of the market are all saying the same thing to investors: prepare for Christmas with open hands and don’t be overly defensive. Two key developments will support this. First, the US and China are reported to be close to reaching phase one of a trade deal that will look to repeal tariffs enacted after the collapsed May trade negotiations.
US President Donald Trump tweeted that when phase one of the deal is signed, it will be immediately followed by phase two, which will look to gradually repeal some of the tariffs that came into effect before May. I would not bank on phase two of the deal, but phase one, if it happens, will be good enough for December.
According to some offshore investors we spoke with over the past two weeks, a key event to watch will be the tariffs scheduled to come into effect on December 15. If they are delayed before phase one is signed, it increases the chance that the signing will take place. However, if they come into effect the whole deal may be at risk of collapsing. If phase one is signed before December 15, the tariffs become a gauge for phase two of the deal in the same manner.
Second, global liquidity seems to be increasing and the US yield curve has normalised. When the US yield curve inverted earlier in 2019 many investors were worried about the possibility of a US recession in 2020, but the recent move has been interpreted as a sign that investors are becoming less bearish on the economy.
Whether a trade truce and improved liquidity will be enough to reverse the slowing of the US and global economies remains uncertain, but the markets have already welcomed the developments.
The US Federal Reserve and European Central Bank have both shifted their stance to pause further monetary stimulus, but the already announced stimulus will remain in place. In the absence of any shocks, this should support markets going into the year end and first quarter of 2020.
One risk event that remains is the December 12 UK election, which may in effect prove to be a vote on Brexit before the actual Brexit vote scheduled for January 31.
• Mhlanga is chief economist of Alexander Forbes.
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