Pre-election policy paralysis makes foreign equities ‘more attractive than JSE’
European and Japanese equities are better placed right now while the outlook for SA remains cloudy, says asset manager Citadel
The biggest sell-off in SA equities since the outbreak of the global financial crisis a decade ago has not made them appealing to one of the country’s largest independent wealth managers because growth-boosting policies will likely be on hold until the elections.
“At this stage, we view global equities as offering better prospects,” said Maarten Ackerman, chief economist and advisory partner at Citadel, which is part of Peregrine Group and manages about R50bn. He said the company preferred European and Japanese markets.
The JSE all share lost 11.4% in 2018, the worst performance since 2008,according to Iress data, as stocks were held back by an economy that slipped into a recession and a global sell-off that saw the S&P 500 lose 6.2%, also the biggest drop in a decade.
Local stocks have had a disappointing start to 2019, with the all share losing 1.47% by Monday's close. The outlook for the local economy remains clouded with analysts pessimistic that the government will take the necessary actions needed to kickstart growth before the general election in May.
The debate around land reform, one of the main factors behind the rand’s 14% drop in 2018, is unlikely to be settled before then, while difficult decisions around ensuring the financial and operational sustainability of key state-owned enterprises such as Eskom and SAA are also likely to be delayed.
Ackerman said in a statement that while SA’s new political administration was “slowly making headway in turning the economy around”, much would be on hold until after the polls.
The country is unlikely to see any meaningful reform until the ANC and President Cyril Ramaphosa “receive a solid mandate from voters to enable government to concentrate on the business of governing.”
Once there was “sufficient clarity and motivation” for local investors to pile back into SA stocks, foreign investors would likely follow.
“But if things do not fall into place as envisaged, 2019 will prove another tough year for the country.”
Citadel expected “a year of greater volatility” owing to heightened geopolitical uncertainty and the outside chance of a bear market globally, and will therefore follow a defensive strategy in 2019, Ackerman said.
“We have increased the amount of shock absorbers — such as hedge funds of funds, protected equity and defensive stocks — being held in our portfolios and we are reducing exposure to sectors that are vulnerable to market volatility,” Ackerman said.
Citadel expects positive economic growth in the US in 2019 to support equities even as the pace of expansion slows.
“Although the pace of economic growth is slowing, it is still expected to remain positive, leaving expectations for company earnings in comfortable territory.”
However the likelihood of a recession, accompanied by stock declines, increases significantly going into 2020.
“A tougher year is more likely to materialise in 2020 when the US will need to negotiate higher interest rates and growth disappointments in an election year. A recession could even be a possibility then, with a dismal US equity market to match.”
At 10.15am on Tuesday, the JSE had added 0.55%, tracking gains in global markets as investors cheered signs of compromise in the US-China trade talks.
The JSE's small and mid cap indices — which are primarily constituted of companies whose focus is on the domestic economy — were flat and down 0.14%, respectively.