Dear client,
The global sharemarket correction which started during
January 2018 is causing many investors to stress. That is understandable,
especially if we take the political uncertainty South Africans have experienced
over the past few years into account.
A majority of economists believe that it is only a
correction and to panic and to switch your investments in growth funds to the
money market or similar funds can cause your investment portfolio great harm.
If you want to make a move, do it after the market had a good run, but now is
probably the worst time to withdraw money from growth funds. It is rather a
good time to invest now.
It is true that the trade tariffs of
Trump have undone the recovery efforts in markets since the initial
correction lows seven weeks ago. The MSCI World Index, in Dollar terms, is back
at October levels.
At this stage it is still a correction in the ongoing
Bull market, being -9.4% below the record highs (see on 26 January this year).
We believe Trump is more intent on negotiating a better deal for the US than
entering a tariff war.
As mentioned previously the overall trade deficit in
goods and services with the World Widened by 12% in 2017 to 566 billion, the
highest in 9 years. So Trump certainly has the numbers on his side in terms of
negotiations.
RMB Morgan Stanley says that the S&P500 Index is
now trading at 16 times earnings expected in 12 months, which means the market
is still undervalued, as many economists believe that a fair PE or price
earnings ratio is 18 times.
It is interesting that the MSCI emerging market index
is -7.9% from its late January high, and so is outperforming the developed
market, which is very unusual. Usually in times of trouble this index falls
further, as currencies also get knocked. This is a healthy sign that the
usually more volatile emerging market index is outperforming. So funds continue
to flow into emerging markets because of which we are so positive about India.
Shares usually rise 20% - 50% above fair value and many economists believe that
the expansion is still in the middle stages.
The expansion has support from tax cuts,
deregulation, a lower dollar, accelerating productivity and good earnings
growth. Moderate inflation is a key ingredient for a healthy economy.
Based on history, a recession does not normally occur until inflation
moves up sharply and the Fed engineers the downturn.
How long will the present strength of the Rand last?
When should one consider to move funds to
offshore funds? Since the US Dollars low of just over $1.25 to the Euro on 25
January 2018, there has been some consolidation in the Dollars down trend or
Euro’s up trend over the past two months. The Dollar has weakened to +/- $1.25
to the Euro, but the consolidation of the situation remains intact
for now (largely sideways move). A strengthening of the Dollar would have
caused the Rand to depreciate, but it seems to us that the Rand will also move
sideways for the next few months.
Friendly Greetings
Andre Delport