US ECONOMY CONTINUES TO GROW
The economic expansion in the USA continues, now for the 103rd month in a row. This is just 17 months short of the longest economic upswing experienced in the USA between 1991 and 2001. Both the Dow Jones Industrial Index and the S&P 500 touched new all-time highs during the month. The S&P 500 recorded its 13th record high at the end of the month; on January 26, it rose 1.2% – its biggest gain in the last 11 months. The Dow Jones index touched new highs in the first days of the new year and went above 25 000 for the first time. This was the index’s fastest run to a fresh 1000 point milestone in history. The other big index in the USA – the tech heavy Nasdaq – was not left behind in this market exuberance. The Nasdaq Composite touched 7 000 for the first time ever. This index reached its last major mile-stone less than nine months ago when it crossed the 6000 mark in April.
Proposed tax changes by the Trump administration remain a strong talking point in the US. Market watchers expect that this could boost growth by 0.3% this year and 0.2% in 2019. US inflation is slowly – modestly though – rising and this should allow for up to three interest rate increases this year.
The strong performances were also experienced in the Eurozone, with manufacturing and services sentiment levels improving further, indicating a broad-based economic recovery. The improving economic situation is not isolated to the larger economies, countries like Greece are also experiencing growth. With the economy firing on all cylinders, investors’ expectations for one of the countries in the euro area to leave within the next twelve months dropped to only 8% in December last year, a far cray from the 73% registered in July 2012 in the wake of economic drama in Greece.
In the UK, however, things or not that rosy.
Mark Carney, Governor of the Bank of England, noted recently that the UK economy had gone from being one the fastest growing economies in the world in the G7 group, to one of the slowest due to Brexit uncertainty.
The MSCI All World Index was up by 5.3% in January, largely boosted by a 5.7% gain in the S&P 500. The Eurostoxx 50 gained well during the first part of the month but returned some of the gains towards the end of the month. In Japan the Nikkei 225 was up by 1.5%. Asian stocks ended the month 7.5% higher, while the MSCI EMEA (Europe, Middle East and Africa) Index rose 5.5%.
IMPROVED SENTIMENT DRIVES RAND PERFORMANCE
A number of events sending positive signals were the main reasons for the rand improving by nearly 3.5% against the US dollar in January. Investors developed a sense of optimism that new ANC President Cyril Ramaphosa will set a new direction for the country. Fin24 reported that SA’s currency has had its best three-month run in almost ten years. Many market reports mentioned the ‘Ramaphosa effect’ although commentators cautioned that there are still many uncertainties to be aware of. The decision to forge ahead with an inquiry into state capture, a new Eskom board and firm stance on the unaffordability of nuclear energy added to the positive atmosphere.
The local equity market moved broadly side-ways for the month. The FTSE/ALSI All Share Index inched 0.1% higher in January, while the returns from the market’s underlying constituents varied considerably. The FTSE/ALSI Resources Index increased by 3.2% in the month, in line with a rise in commodity prices. The FTSE/ALSI financials Index, on the other hand, collapsed 3%, with losses extending in the final week of January 2018 in reaction to a negative report released on Capitec, by Viceroy Research.
The FTSE/ALSI Industrials Index treaded water in January 2018, ending the month 0.4% higher. Rand-hedge shares suffered on the back of further gains in the local currency. Listed property plunged sharply in January 2018 (negative 9.9%) on speculation that companies in the Resilient property stable would be mentioned in an unfavourable corporate governance report by Viceroy Research.
In light of lingering sovereign rating downgrade risks and a recent sharp uptick in international oil prices, the SA Reserve Bank (SARB) decided to leave local interest rates unchanged at 6.75% at its January 2018 Monetary Policy Committee meeting.
Although the SARB noted an improvement in the inflation outlook since its November meeting, it continued to view upside risks to its forecast. It is expected that inflation will remain comfortably in the target band in the months ahead. Despite this most commentators are not expecting more than one cut of interest rates (of 25 basis points) this year.
The ‘Ramaphosa effect’ was also listed as a contributing factor to an improved reading of the Absa purchasing managers index (PMI) in January. The seasonally adjusted PMI rose to its best reading in nine months in January as business activity recovered and new sales orders increased. Business Day reported that the PMI tends to be a reliable forecaster of the monthly manufacturing sales and output figures published by Statistics SA. “The jump was probably because of the election of Ramaphosa as ANC President in December. Respondents to the PMI survey seemed optimistic that Ramaphosa would succeed in enacting investor-friendly reforms and boosting growth,” the paper reported.
Sales of new vehicles declined in January. The industry seems positive about the outlook for the year. Sales of all new vehicles totalled 45 888, down 8.9% compared to the 50 386 of January 2017. Car sales fell 11.6% from 36 908 to 32 642 while most categories of commercial vehicles also recorded a decline. It was reported in Business Day that the biggest cause of the slide was a 33% decline in car sales to rental firms after they boosted stock levels with purchases made last year. Industry experts are of the opinion that the vehicle market will do better than the 1.8% growth achieved in 2017. Export sales did better than January last year and leapt 22% from 11 651 last year to 14 212 vehicles and it is expected that export sales will continue to do well in 2018.