We started 2019 with a warning that cash as an asset class would not be king for the next five years owing to the valuation level of equities all over the world. We mentioned that the rand could show some strength and that Brexit as well as the US/China trade wars would command centre stage.
Looking at the major equity indices, only South Africa, Hong Kong and the UK have not had returns of 20% plus. On a valuation basis, South African equities should still give you a 30% plus return to just recoup the losses over the last five years. This is, however, very unlikely given the disappointing new leadership under Ramaphosa. The rand had been very volatile but ended only 2% stronger against the US$, while the star of the show was the S&P500 in the USA – giving you a 30% return. (See the slide below for 2019 asset class returns.)
After a spell of weaker growth, the world economy looks set to pick up in 2020, extending one of the longest-ever periods of expansion. This growth will create a favourable environment for risk assets, like stocks. We do see that social problems such as rising inequality and a surge in populism have implications for taxes and regulations. The latter may be targeting mega companies like Facebook, Google and Amazon. One of the most important events in 2020 will be the presidential election in the US. If Donald Trump wins a second term, markets will most likely react positively but should a Democrat with a socialist message like Warren or Sanders win, things may take a very different turn.
Trade policy frictions; deglobalisation; interest rates nearing lower bounds and crimping the effectiveness of monetary policy; as well as climate change are having real-world consequences, affecting asset prices as investors start to pay attention. These issues make the longer-term outlook far less certain. Global uncertainty will also make things more difficult for South Africa, which is urgently in need of higher growth. The perilous state of a number of SOEs remains a negative risk to the fiscus, and therefore to domestic economic growth.
So, for 2020 we predict positive equity returns for the US, but not near the 30% achieved in 2019. We expect SA and European equities to be positive with the biggest potential in emerging markets other than SA. The rand is too tough to call but a downgrade by Moody’s will see it weaken, or at least prevent it from strengthening much. SA bonds still offer an attractive yield and cash should be the safe haven for imminent expenses.
