Is 2019 an opportunity to buy into the market at lower prices?

With the Budget Speech due to take place next week, many South Africans are hoping for greater certainty following the tumultuous events in 2018.

Luigi Marinus, portfolio manager at PPS Investments noted that last year was laden with events that shook the market, leading to negative double-digit returns.

Over the last 58 years, this has only happened on the JSE All Share Index during seven calendar years, he said.

This begs the question: will history repeat itself? Should we brace for another negative year or are we faced with an opportunity to buy at lower prices?

Marinus said that while there is no way of predicting the outcome of the market for 2019, the following important events could influence stock market returns:

An election year that may be a turning point for South Africa

Marinus said that one could naively argue that elections are political and not financial events, but the reality is that the lead up to and the outcome of the South African National Elections in May this year will carry economic significance.

“Raging issues, such as the land expropriation debate and effective financial budgeting on the part of National Treasury will need to be addressed during this time.”

“Both global and local investors will be encouraged by a perceived business-friendly outcome and equally discouraged by any uncertainty in the outcome of the elections, as will the ratings agencies that are keeping a close eye on SA.”

SA GDP growth may impact markets indirectly

In 2018, South Africa experienced its first technical recession since the global financial crisis and unfortunately came at a time when global GDP grew at 3.7% and developing economies GDP grew at 4.7%, according to the International Monetary Fund annual real GDP growth.

The technical recession was announced following two consecutive quarters of negative GDP growth in quarter one at -2.6% and -0.4% in the second quarter of 2018.

Fortunately, South Africa recovered quickly from the recession with positive third quarter GDP growth at 2.2%. “What is of increasing concern for 2019 is the view that world GDP has plateaued and will no longer serve as a tailwind to local GDP growth,” Marinus said.

PPS Investments said that the relationship between annual GDP growth and calendar year market returns in SA has an almost zero correlation – since 1960 to 2017 the correlation has been -0.08 – when looking at statistics.

“While this could imply that the short-term effect of GDP growth on stock market returns may be spurious, the effect on the consumer base in SA is likely to result in insufficient job creation to ease unemployment rates,” Marinus said.

2018 Global trends that will permeate into 2019

According to PPS Investments, two major global uncertainties that are set to continue in 2019 are the trade wars, (primarily between the US and China), and Brexit negotiations between Britain and the European Union.

“Brexit must be concluded by the end of the first quarter, whether a deal has been struck or not. Neither of these situations are positive for globalisation. There is little doubt that the world has benefitted from the ease in which the factors of production has shifted due to globalisation and any moves away from this is almost certain to be inflationary.

“Will consumers be satisfied to pay higher prices for goods only because they are locally produced, or will companies need to tighten their margins to not pass on all costs to consumers? Only time will tell,” said Marinus.

Will investors only be interested in equity returns?

Even though views on stock market return expectations are most debated, especially after a disappointing 2018, the yield offered by local fixed interest assets should not be ignored, said Marinus.

“The SA 10-year nominal government bond continues to offer yields in excess of 300 basis points above inflation, which could serve as a strong anchor to performance if short term volatility can be tolerated.

“In addition, the SA Reserve Bank has consistently alluded to the goal of keeping inflation near the mid-point of the 3%-6% target band, which tempered the market’s surprise when interest rates were hiked in the last quarter of 2018.”

This certainly proves the Monetary Policy Committee objective of keeping inflation subdued, he said.

Read: Investing: Cash vs the JSE right now

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Is 2019 an opportunity to buy into the market at lower prices?