January rattles festive season euphoria out of investors

The year 2020 might have a good ring to it, but the first month rapidly rattled any
festive season euphoria out of investors – both at the turn of the Western
calendar and the Chinese New Year.

Tensions
heighten in the Middle East

On 3
January, in a shock move, President Trump ordered the killing of General Qasem
Soleimani, spearhead of Iranian military operations in the Middle East, along
with other Iran-backed militia at Baghdad airport. Iran’s Supreme Leader
Ayatollah Ali Khamenei responded by saying “severe revenge awaits the
criminals” behind the attack. Shortly after the killings a Ukrainian
passenger plane was shot down by Iran, reportedly by accident, killing all on
board, and Iran also launched a missile attack on bases at Ain al-Asad and
Arbil in Iraq, housing US and coalition forces. Heightened tensions in this
oil-rich region put upward pressure on oil prices.

China
ends year in panic

Later in
the month as China prepared to enter the Year of the Rat panic set in with the
deadly Coronavirus locking down entire cities, such as Wuhan with 11 million
residents. The Shanghai Composite Index reported the worst pre-new year drop in
its three-decade history.

World Bank lowers SA GDP forecast

Also, in
January, the World Bank lowered its growth outlook for South Africa due to
electricity supply and infrastructure constraints in SA, as well as weaker
global economic conditions weighing on export demand. The SA Reserve Bank’s
Monetary Policy Committee responded by unanimously cutting the repo rate by
25bps to 6.25%. It also revised down its forecast of GDP growth for 2019 to
0.4% (from 0.5%). Consumer-price growth quickened to 4% compared with 3.6% in
November.

The shake-up at SA parastatals continue

The signs
have long been there that there’s no more room for ‘business as usual’ at SA’s
state-owned enterprises (SOEs) and semi-SOEs. During January Telkom announced
large-scale retrenchments, Eskom continued its restructuring plans and SAA
received a loan from the Development Bank of Southern Africa but not before it
had to cancel certain low-volume flights and put some of its planes up for
sale. In total the planes would amount to around R37 billion in value if bought
new today.

During
January offshore investments benefited from rand weakness

During
January 2020 the rand weakened by 7.27% against the dollar and by 5.90% against
the euro, resulting in strong rand returns from the main international indices.
The MSCI World Index returned 6.61% in rand terms; the Bloomberg Barclays
Global Aggregate Bond Index gave international bond investors 8.64%. The
FTSE/JSE All Share Index (ALSI) lost 1.69% on a total return basis, while the
SA Listed Property Index (SAPY) lost 3.06%. The All Bond Index (ALBI) returned
1.19%, and cash returned 0.58%.

Over the
past year international indices ran exceptionally hard

For the 12
months to 31 January 2020, the MSCI World Index gave South African investors an
exceptional 33.08% total return in rand terms; the Bloomberg Barclays Global
Aggregate Bond Index gave 20.47% in rand. The rand weakened by 13.03% against
the greenback and 9.17% against the euro during the past year. The ALSI and
ALBI gained 7.14% and 8.48% respectively. Listed property (the SAPY) lost 9.50%
and cash returned 7.27%.

International
equities remain the 10-year top performer

Over the
long run (10 years to 31 January 2020), international equities were the top
performing main asset class from a South African investor’s perspective, with
the MSCI World Index giving an annualised total return of 17.68% in rand terms.
International bonds gave 9.88%. Locally, the ALSI returned 10.99% per year and
listed property 10.52%. The ALBI and STeFI delivered 8.95% and 6.52% per year
respectively over the 10 years to 31 January 2020.