The first half of 2017 has provided us with much of the political and economic uncertainty that market commentators have warned of in recent years. It has almost become the “new normal” to turn on the news or read online about some new turn of events that has rattled markets somewhere in the world. South Africa, it seems, is leading the pack when it comes to politicians rocking the boat in our economy.
Despite this, global equity markets have weathered the storm and produced great returns (in dollar terms) over the last two quarters and have coined the phrase the “Trump Trade”, citing his focus on infrastructure development and job creation being what has buoyed US markets in 2017.
Emerging market equities have also performed well, however South Africa has unfortunately not joined in the spoils as our markets continue to be plagued by non investor friendly policy making.
While global equity markets continue to show signs of strength, it is against the backdrop of a difficult geo-political environment, with conflict between and within nations being more common as each month goes by. Political divides within major economies such as the US, UK and France, have played their part in making investors and corporates very nervous of deploying capital into the “real” economy.
This was recently discussed in an article by legendary bond investor Bill Gross where he cites that investors are making money in the financial economy, buying and selling financial assets on stock and bond exchanges and not deploying capital into the real economy. I.e. The setting up of businesses, factories, SME’s etc that create the backbone of any country’s economic growth and the employment of its people.
This is starkly evident in South Africa as we see mining companies sitting on stockpiles of cash, un-deployed, cutting jobs and scaling back on spending. This is assumed to be partly due to lower commodity prices and the slowdown of the commodity super-cycle. However, many market commentators also speculate that the local business and regulatory environment is not conducive for spending and growth within South Africa, even more so now that the new Mining Charter has been introduced, sending mining shares into decline.
The silver lining is the possibility of reform within the ruling party post their elective conference later this year. Good, strong leadership could restart the growth engine in South Africa and is something to hope for and demand from our government.
As we look forward to the last two quarters of 2017, we take comfort in the objective and researched investment process that underpin all our clients’ portfolios, and urge you to stay focused on your long-term objectives.
