Economic & Market Overview – May 2018

Global

The moderation in growth across advanced economies in the first quarter of 2018 suggests that global economic growth could be less robust than anticipated this year, though the downturn is unlikely to be prolonged. Compared to the last quarter of 2017, both the Eurozone (0.4%) and the United Kingdom (0.1%) grew at a pedestrian pace. Underlying conditions in these two regions, however, remain firm, indicating that the slowdown is temporary.

Global PMI figures for April point to a recovery in the second quarter of this year as manufacturing conditions improved across the board. Fairly accommodative monetary conditions, paired with strong employment growth and rising wage inflation, should spur consumer spending which would result in a steady pick-up in global growth over the remainder of the year.

Across the pond, the American economy is still in good health. At this late stage of the current economic cycle (which started in 2009), there are surprisingly few signs of a pending recession. Inflation in the United States has now moved above 2% and is likely to head up to 2.4% before the end of the year, which will likely prompt the Federal Reserve to continue their path of interest rate increases. This expectation is reflected in the yield on the ten-year US Treasury as, towards the end of April, it moved above 3% for the first time in seven years.

On the trade war front, April was a little quieter, but we’ve learnt not to try and predict President Trump’s movements and statements with any degree of accuracy. Expect tweets from the Donald around tariffs and taxes to cause significant volatility in months to come.

Growth in global equity markets has reflected much of the good economic news in 2017 and the first quarter of 2018, and investors can expect the heightened volatility in equity markets to continue as the global economy moves deeper into the last leg of its growth cycle.

South Africa

The increase in business and consumer confidence that was triggered in December 2017 during the ANC’s elective conference continued well into 2018 with the FNB/BER Consumer Confidence reaching a record high of 26 in the first quarter of 2018. The surge in all three sub-indices – measuring the economic outlook, ratings of household financial prospects, and the suitability of timing to purchase durable goods – reflects renewed optimism about the future of the economy and consumer willingness to spend. Credit extension in the private sector has been on the decrease for several years now and is likely to turn around soon. Coupled with the improvement in sentiment, it points to a pick-up in household consumption in 2018. This will be supported by low inflation which came in at 3.8% in March. The recent rising trend in the oil price, will likely lead to a moderate increase in inflation in the next year. RMB Global

Markets expects both headline and core inflation to fluctuate around the 5% level well into 2019.

Following the Reserve Bank’s 0.25% interest-rate cut to 6.5% at its March Monetary Policy Committee meeting, rates are likely to remain on hold for the remainder of the year as price pressures are expected to tick up. Since the previous meeting, oil prices have risen to levels last seen in late 2014 and, more importantly, above the 2018 forecast of the Reserve Bank. This, together with the recent rand depreciation against the US dollar, poses upside risk to the inflation outlook and is likely to prompt the Monetary Policy Committee to keep rate cuts on hold for the time being.

The South African economy is expected to grow at between 1.5% and 2% in real terms over the next two years. While this is not exciting compared to the robust growth of around 5% in most emerging markets, it’s certainly far better than the 0.5% we saw just one year ago. President Ramaphosa needs to untangle nearly a decade of damaging fiscal actions but has made a promising start. In April he announced a drive to attract R1.2 trillion (USD100 billion) in new investment as he seeks to kick-start an economy that looks to be on the rebound following years of stagnation. He appointed a team of business and finance experts to scour the globe for $100 billion in investment to boost the ailing economy. The team of economic envoys includes former Finance Minister Trevor Manuel as well as former Standard Bank Chief Executive Jacko Maree.

Market performance

After a very tough first quarter, South African share prices rebounded strongly as the FTSE/JSE All Share Index ended the month 5.4% higher. Resources stocks, in particular, boosted returns as the oil price crept up to over USD 70 per barrel.  April  saw  SA  Listed  Property  outperform  all  other  asset  classes as the large counters recovered considerably from their losses in the first quarter. Fortress B (up 46.2%), Resillient (up 35.5%) and Redefine (up 20.3%) were the top performing stocks in the Top 60 for April. Aside from resource shares, the large rand-hedge shares also performed well, supported by the weaker rand. Global equity markets kept pace with the local market when measured in rand terms on the back of hopes of improvement in the trade dispute between the US and China.

The strong market recovery in April greatly assisted the 12-month returns of local and emerging market equities, as well as local bonds, leading to double digit returns over one year.

Commentary: Learning from Berkshire Hathaway

In last month’s commentary, we quoted the words of Alan Greenspan in a 2014 meeting with Warren Buffett: “Warren, it strikes me that if you did nothing else you never sell. That is, if you can grit your teeth through and just disregard short-term declines in the market or even long-term declines in the market, you will come out well. I mean you just stick all your money in stocks and go home and don’t look at your portfolio you’ll do far better than if you try to trade it.”

On Saturday 5 May, Berkshire Hathaway shareholders from all over the world convened in the CenturyLink Centre in Omaha, Nebraska, to listen to the pearls of wisdom flowing from the mouths of Warren Buffett (now 87 years old) and his long-time business partner and friend Charlie Munger (94).  In this month’s commentary we’re highlighting some of the more interesting take-outs of this meeting, their shareholder’s letter that was published in March this year and previous letters. Buffett himself acknowledges that he’s made many mistakes during this time, but, looking at the return to shareholders over more than five decades, he’s learnt from most of these mistakes:

Why investors shouldn’t use borrowed money to buy stocks

“There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

On being a patient investor

Rudyard Kipling poem:

“When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:

If you can keep your head when all about you are losing theirs …

If you can wait and not be tired by waiting …

If you can think – and not make thoughts your aim …

If you can trust yourself when all men doubt you …

Yours is the Earth and everything that’s in it.”

On winning his 10-year bet against hedge funds:

“Let me emphasize that there was nothing aberrational about stock-market behaviour over the ten-year stretch. If a poll of investment ‘experts’ had been asked late in 2007 for a forecast of long-term common-stock returns, their guesses  would  have  likely  averaged  close  to  the  8.5%  actually delivered by the S&P 500. Making money in that

environment should have been easy. Indeed, Wall Street “helpers” earned staggering sums. While this group prospered, however, many of their investors experienced a lost decade. Performance comes, performance goes. Fees never falter.

The bet illuminated another important investment lesson: Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.”

On his succession plan:

“I’ve saved the best for last. Early in 2018, Berkshire’s board elected Ajit Jain and Greg Abel as directors of Berkshire and also designated each as Vice Chairman. Ajit is now responsible for insurance operations, and Greg oversees the rest of our businesses. Charlie and I will focus on investments and capital allocation. You and I are lucky to have Ajit and Greg working for us. Each has been with Berkshire for decades, and Berkshire’s blood flows through their veins. The character of each man matches his talents. And that says it all.”

Given that Warren often acknowledges the priceless contributions of his great partner Charlie Munger, we’ll end off with a few of his priceless quotes:

“If you’re a duck on a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond.

Lesson: Don’t fall prey to self-serving bias. Always consider the underlying reasons for your success or failure.

“I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, ‘My goodness, they’re purple and green. Do fish really take these lures?’ And he said, ‘Mister, I don’t sell to fish.’”

Lesson: Understand the motivations of the people you’re dealing with.

“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads–and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

Lesson: Never stop learning.  Wisdom comes as much from the desire to learn as it does from the knowledge gained.

And lastly, on the topic of investments: “When any person offers you a chance to earn lots of money without risk, don’t listen to the rest of their sentence.”

Lesson: There is no free lunch. If the potential returns are high, the risk is also high.

-Source: APS Monthly Commentary