Global economic slowdown and trade war hit risk appetite

MORE AND MORE evidence that the global economy is turning for the worst and the more aggressive stance of the US on trade tariffs against China had led to a sudden turn-around in risk appetite across the globe.

Together with this more bearish outlook of investors the news that the ANC government intends to nationalise the SA Reserve Bank by buying up all private owned shares, has led to a sell-off of local bonds and shares.

In reaction the rand exchange rate had recorded one of its biggest losses in value for the year during last week. One can expect that a lot of election promises and noise up to the election on May 8 will contribute towards large volatility on the share, capital and exchange rate markets domestically.

The news that the Chinese exports that had tumbled by 20.7 percent yearon-year in February contributed a lot to negative sentiment on a global slowdown.

This news came barely a day after the European Commission had scaled down economic growth prospects for Germany, the biggest economy in Europe to a growth rate of only 1.1 percent in 2019, down from the previous estimate of 1.8 percent. The Commission also forecast that the Euro Area will grow by only 1.3 percent in 2019, down from the previous forecast of 1.9 percent. Analysts now also started to discount the US growth prospect more on the downside.

The more and more negative sentiment on global growth prospects had led to a big sell-off by offshore players on the JSE.

This although South African stocks are the cheapest on record relative to their emerging market peers. Foreign investors had been net sellers of South African stocks for 11 consecutive days last week.

On Thursday the news that the ANC government imminently aimed at nationalising the South African Reserve Bank had thrown further oil on the negative foreign sentiment. Since the beginning of the year offshore selling of South African shares had skyrocketed to R25.4 billion.

On the JSE shares prices continued to come under pressure. Although the Alsi index total return is still 6.23 percent up for the year-to-date it still lags by -2.8 percent over the last year.

During last week the Alsi had lost 714 points or 1.3 percent. The Resources 10 index gave up 2 percent, Financials were down by 2.5 percent, while the Industrial 25 index was traded down by 0.3 percent. The listed Property index had ended the week flat gaining a mere 1 point or 0.2 percent.

The rand exchange rate remained under pressure last week. The currency had depreciated 35 cents (2.4 percent) against the dollar at one stage during last Friday morning, but did strengthen somewhat to R14.41/$ on Friday evening.

Against the pound the rand had traded above the R19 on Friday morning, but also had strengthened strongly on Friday afternoon to levels around R18.74, around 6 cents stronger than the previous Friday. Against the Euro the rand ended the week flat on R16.20 against R16.18 the previous week.

This coming week investors will look out for the release of South-Africa’s business confidence index for the fourth quarter 2019. Statistics SA will also publish the latest mining and manufacturing production numbers. Globally attention will shift to the latest inflation figures for most developed and emerging market countries.

Chris Harmse is chief economist at Rebalance Fund Managers.