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Two key events defined the local markets in 2017. First, our market finally broke out of its three-year-plus sideways range as the Top40 breached 50 000 in August, before moving on to trade above 55 000.
I had been expecting this because when a market moves sideways for a protracted period, the break is always higher.
The logic is that a sideways market is a correction in time as opposed to a correction in price, such as a crash.
While going sideways, stock earnings are increasing and hence valuations improve. On an individual stock level, it was a mixed year, but great for exchange-traded fund (ETF) holders.
The second massive development in 2017 was the slow drip of rating agency downgrades that now sees us sitting right on the edge of full junk status, with just Moody’s keeping us afloat.
That lifeline runs until late February when they will make another pronouncement.
Globally markets have all been in full bull market, while bitcoin has set new definitions for the term “bubble”.
Emerging markets also finally joined the bull run this year. For many the surprise of 2017 was the rand, which started the year at around R13.75/$ and as I write this late in November, is a few cents stronger.
The rand is simple. If foreigners are buying our assets (commodities, bonds and shares), they first have to buy rand, and that’ll see it move stronger.
If they’re selling, then they sell the rand to take the money back home, and this will weaken the currency.
With our government bond yields weakening over the year, many global investors are attracted to these yields.
They’re equally attracted to our newly installed bull market, and higher commodity prices have also helped.
The net impact is rand buying and a currency that survives finance minister firings and rating downgrades.
Political outlook
But this is all about the past; what about 2018? In short, I am bullish for the JSE for 2018 and while the 54th ANC Elective Conference is being touted as the big determiner of how 2018 plays out locally, I think whichever outcome we get, we’ll see the JSE higher next year.
As I write, the view is that Cyril Ramaphosa will edge out Nkosazana Dlamini Zuma to become the new president of the ANC and ultimately of South Africa.
I agree with this theory but the race is close and the biggest risk is actually the conference being disrupted and not proceeding.
If the conference goes well and a clear winner emerges, the market will most definitely prefer a Ramaphosa victory and a swift recall of President Jacob Zuma.
But even a Dlamini Zuma victory will likely see Jacob Zuma being recalled as president sooner rather than later as the ANC starts looking ahead to the 2019 general election.
I absolutely expect Dlamini Zuma (if she wins) to start distancing herself from President Zuma almost as quickly as Ramaphosa would.
So, assuming the elective conference goes off without a hitch, I think President Zuma will be recalled fairly quickly, Moody’s will leave us alone at its next review and we can expect a bullish 2018 for SA.
Our rand will move stronger and the Top40 will move higher with some of this Top40 move being dampened by the stronger rand, but boosted by booming SA Inc. stocks.
The third scenario is that the conference couldn’t take place. If this happens, the rand will crash, Moody’s will send us down to full junk status and that will drive our offshore earning-dominated market higher and decimate SA Inc. stocks. (Also see page 24.)
So my view is that regardless of the elective conference outcome, local markets will move higher in 2018, even if one of the outcomes leaves SA in a very dark space politically and economically.
There is one big risk to this view – if the global bull market suddenly hits the skids.
Will the bull falter?
The current run in global markets (lead by developed markets but with emerging markets joining the party recently) has been on the go for some nine years, making it the second-longest ever and while it could well become the longest at some point, every bull market ends.
The US has started slowly unwinding its quantitative easing (QE) programme and is hiking rates, while the UK also took a tiny step to higher rates (very cautiously as Brexit looms).
Europe is the laggard here as it is still buying bonds and keeping interest rates very low.
This normalising process is going to be slow and will take many more years to unwind fully. If that view holds correct, then the bull will survive 2018 unless something comes from left field to derail it.
Importantly, the returns for these developed market bull markets will be more modest, and the S&P500 is unlikely to see another +20% year.
If we couple a lower return in developed markets with my view for a stronger rand, then offshore is not going to be the best place to be for 2018, and good old-fashioned JSE investors will likely be best rewarded for staying local and starting to look at some SA Inc. stocks.
Budget deficit
On the ground in SA things will start improving. 2017 saw a short recession and a small drop in interest rates before the monetary policy committee (MPC) halted its rate-cutting cycle.
Consumers remain under pressure even as inflation has dropped off on the back of returning rains (in the summer rainfall regions), but the February Budget is going to hurt as the minister needs to find R50bn to plug the revenue hole.
The question is: will VAT be raised to plug that hole? An increase of two to three percentage points in VAT will address much of the shortfall, while any other tax increase will hardly make a difference.
Surely a VAT increase in 2018 can be politically offset with more zero-rated products to help protect the poor?
Whichever way that giant tax hole is plugged, it will hurt local consumers and 2018 is going to start off as another tough year. However, it is likely to start improving slowly, and importantly, consumer confidence should start returning.
We’ll begin seeing some economic growth during the year, with GDP breaching the lethargic 1% level and moving towards 2%, with 2019 growth expectations looking better. We’re not out of the woods by any stretch of the imagination, but we can start to believe that that light at the end of the tunnel is not a train.
Large-cap and SA Inc. stocks will be the initial winners as they look into 2019 (markets always look a year or more ahead). Eventually this will also help small- and mid-cap stocks that are mostly very SA Inc.-focused and that have had a very tough 2017 as liquidity has either headed for the exits or for the large-cap stocks.
At some point in a bull market, buyers start to hunt lower down the list as the large caps have run hard, and they start buying smaller stocks, starting a run in the small- and mid-cap space.
JSE outlook
To recap: the ANC elective conference is being played as the biggie for setting the tone of 2018 and while markets have a preferred victor, I think a successful conference and a new country president in early 2018 will entrench our current bull market.
Investors are likely better off investing locally, especially as I expect rand strength and a slowing in the global bull market as our newly minted bull market continues higher.
I am bullish for the JSE in 2018, although, as always, there are potential risks. As usual, expect a very noisy year from markets and politicians locally and globally.
We need to put our heads down and manage what we can, with thoughtful portfolio management and no knee-jerk responses.
Just to sum up my opening comments: If the ANC elective conference is a mess, does not happen or is challenged in court, things are bound to get ugly – very ugly.
The rand will weaken markedly, offshore earning and dual-listed stocks will boom and SA Inc. will crumble.
This will see the Top40 heading higher so we’ll be making money, but confidence will collapse, and it will be a very dark year for SA. Offshore stocks and ETFs will be the winners.
This article originally appeared
in the 14 December edition of finweek. Buy and download the magazine here.
