October was a bad month.

Note: Information in this newsletter is based on data on Thursday morning 1 November. Since then the JSE is up 3%, the Rand is 3% stronger and the S&P is 2% stronger.

The JSE All Share Index is 12% down for the year to date. This puts it firmly into correction territory, which is defined as a drop of more than 10% from its high. The S&P500 Index in the US is 6,5% down from its high, but year to date on +1,4%. For South African investors with offshore equity the depreciation of the rand against the US$ resulted in a 19% return on capital invested in the US on the currency weakness alone.

There are usually several reasons for markets to have the kind of sharp drop we have seen in October. Currently we can blame the tariff war between the US and China as one of the main culprits. We can also blame the Italian economy, a hard Brexit, the midterm elections in the US and the crackdown by regulators on the social media and other IT companies.

Markets are almost never fairly valued and we have to acknowledge that some of the FANG stocks in the US were too expensive and the pullback could be seen as healthy. This could give investors with a longer-term view a buying opportunity into companies that will rule the world for the next decade or two. We have to remember that markets are forward-looking and that after such a sharp drop in prices, any good or even neutral news could see some companies rebounding handsomely.

In a recent Moneyweb article by Viv Govender the following interesting fact was mentioned regarding the upcoming midterm elections in the USA: “The year following a midterm election has invariably been positive, sometimes spectacularly positive. The reason most analysts give for this pattern is that in the year before a midterm election, markets are spooked by the political uncertainty. Without this uncertainty, markets are able to focus on fundamentals and therefore rebound the year after. The average fall leading up to an election is -19%. The rebound in the year that follows averages more than 30%. If history repeats itself we might see a very good year in 2019 after this recent market slump.”

Most commentators are also of the opinion that given the strong US economy, any positive news on the trade war front and/or dovish policy statements (interest rates to remain lower for longer) from the Federal Reserve in the US will see the US market spike up.

In South Africa we might have longer-term issues owing to our weak economy. We will have to see the investment pledges actually materializing and corrupt politicians jailed before business confidence will return. The recent drop in our share prices reflects the dire situation in our country and currently there are just so many problems that investors are losing hope. But, with the rand undervalued, taking all your money offshore at the moment might be a bad move and we have to remember that there are fantastic companies in SA that have seen a substantial drop in their share prices, making them very cheap.

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