Finding opportunity in times of uncertainty

Trade wars, Brexit and a range of other factors all made for an extremely volatile and uncertain environment over the past few years, all of which have negatively influenced global financial markets.

The global economic policy uncertainty index showed that, in November 2019, policy uncertainty was its highest since 1998.

Most of this has been caused by the trade war between the US and China. While the US China trade dispute has intensified during 2019, the trade policy uncertainty index shows that uncertainty is still at lower levels than those reached during the negotiations and implementation of the North American Free Trade Agreement (Nafta) from 1993 till 1995.

Comments from Washington and Beijing on the trade dispute also had a big impact on prevailing market sentiment, with markets jumping up or down every time the US or China made comments.

Data shows that between 1900 and 2017 there were more than 1,100 daily stock market jumps of more than 2.50%, with only seven (0.60%) of these attributed to trade policy news. Between 2018 and August 2019 there were 13 daily stock market jumps greater than 2.50%, with five (38.50%) being attributed to trade policy news.

Policy uncertainty in SA is more nuanced and according to the policy uncertainty index of the North-West University Business School it has been caused by anything from Nenegate and cabinet reshuffles to state capture, land reform and state-owned enterprises.

Both global and local uncertainty are affecting how economies and markets behave.

Locally, protracted policy uncertainty and poor economic results have contributed to very low business confidence levels. The NWU Business School report found that high levels of economic policy uncertainty inhibit meaningful investment and consumption.

When investors are unsure, there is usually a flight of capital from riskier assets, such as those in emerging markets, to safe havens such as gold, the US dollar and bonds – with the price of gold steadily increasing since 2018. The move to safe haven assets has affected the rand, which weakened by about 27% against the dollar from October 2014 to October 2019.

A key question is how the local economy could respond to global developments.

Although our economy is likely to be impacted negatively if the US goes into recession, one can argue that domestic assets should rebound when risk appetite returns to global capital markets.

Emerging markets should do well as the dollar should weaken and capital flow back to emerging markets – positive news for most investors in South African assets.

For those pessimistic about any such lofty expectations, it is interesting to note that the last analysis by Moody’s puts SA in the recovery phase of its economic cycle, while the US and large parts of the developed world are in the slowdown phase.

The pending Moody’s downgrade is a major source of worry for investors. However, depressed market levels and five-year credit default swaps (the cost of insuring debt) indicate that a downgrade is already priced in.

Current economic challenges are known and to a large extent already factored into market evaluations.

We believe investor views now reflect a crisis of confidence, rather than an accurate summary of our fundamentals. This means there are opportunities in the local market, and if you select assets carefully you can still enjoy strong, long-term returns even if the economic conditions stay tough.

For more information, visit www.psg.co.za.

This article was paid for by PSG Wealth.