The First quarter of 2018

The first three months of the 2018 calendar year have passed and we have seen interesting developments.

The markets

It’s been a pretty dismal start to the year for the JSE. After a promising start, it has ended the first quarter 6,8% down. That is due in large part to Naspers, which has dropped by 16% over the same period and makes up a significant part of the market due to its sheer size. The US market is also down just over 2% year to date with a big sell-off in Tech stocks like Facebook, Amazon and Google. One of the drivers of this sell-off is the trade war that is developing between the USA and China. At the beginning of 2017, just after Donald Trump was elected president, we wrote the following in a newsletter:

The election of Donald Trump as the new President of the USA saw the equity markets in the US rise to record levels. This is called the “Trump Effect”. Trump is going to rattle the political cage and for now the rhetoric is that he is going to lean toward economic protectionism instead of free trade. He will alienate the relations with China and it seems he will embrace Russia. Currently we see the US$ strengthening considerably against most hard currencies and this might continue for a bit. Unfortunately a strong dollar will hamper USA exports and we might see a reversal of the good fortunes of some of the marginal export companies in the USA, especially those exporting to China. We might also see a stagnation in some of the expensive technology companies like Apple and Google due to tit-for-tat measures by China against the USA.

It seems that Trump is running his country the same way he runs his businesses. He makes a ridiculous demand, knowing that the other party will make a counter-offer that will still be higher than the fair one. This strategy might work well for domestic matters such as lowering corporate taxes with a view to getting big companies to invest in manufacturing in the US instead of elsewhere, but getting into a trade war with China is eroding all the good his internal politics has done. To take it a step further he is also attacking companies like Amazon because he believes they are not “fair” towards the US Postal Service. This, together with data breaches at Facebook and pending regulation, has wiped billions of dollars off the FANG stocks.

We have to remember that when it comes to investments, short-term volatility is part of the game. Overvalued stocks will recover more slowly after a correction but there are a lot of stocks that will offer value on these dips.

Zuma going to court

National Director of Public Prosecutions, Shaun Abrahams, has announced that Zuma will face the criminal charges that were dropped in 2009. Zuma is facing 16 charges: one count of racketeering; two counts of corruption; one count of money laundering; and twelve counts of fraud. These are in relation to 783 questionable payments connected with the arms deal, on account of which Zuma’s former financial adviser, Schabir Shaik, was jailed for corruption.

SA’s credit rating

Moody’s Investors Service has delivered some positive news. The country has been on tenterhooks for 90 days and the rating agency has kept SA’s credit rating one notch above junk but it has changed the outlook to stable. A negative move to junk would have triggered as much as $8 billion of capital outflows, given forced selling of the country’s local-currency debt as it would have been excluded from CitiGroup’s World Government Bond Index.

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