Market overview – January 2019

Market overview – January 2019

Global equity markets started the year on a strong note, with all major equity indices ending January in positive territory. South Africa also posted positive returns for the month, supported by stronger Financials and Resources sectors.

The US Federal Reserve’s decision to keep interest rates unchanged over the near term, coupled with the reported imminent conclusion of the trade war between the US and China, helped drive returns across developed markets. Emerging markets faired equally well, largely on the back of strong returns coming out of Brazil after its new president, Jair Bolsonaro, passed reforms to help bolster the economy.

In the US, markets reacted favourably to the Fed’s easier stance stating that the case for raising rates had weakened somewhat. The announcement was largely seen as an indication of the Fed’s willingness to apply greater flexibility to its rate hiking policy going forward. President Trump and Congress reached a temporary consensus over the border security funding dispute, bringing to an end a 35-day standoff in which the US government was effectively shut down. The US-China trade negotiations continued to make progress, with President Trump set to meet with President Xi in the coming weeks. Failure to reach an agreement would result in US tariffs on Chinese goods increasing from 10% to 25% from the beginning of March.

In the UK, Prime Minister Theresa May had her Brexit deal overwhelmingly rejected by Parliament, with the issue of avoiding a “hard” border between the UK and the Republic of Ireland the main obstacle to agreement. Subsequent negotiations between all sides led nowhere, exacerbating uncertainty with the deadline less than two months away. Elsewhere, the European Central Bank (ECB) highlighted the contraction in economic growth as a growing concern for the region, factoring downside risk into its growth forecast. ECB President Mario Draghi cited slower growth in China and Brexit uncertainty as among the main factors weighing on the Eurozone economy.

In Asia, investor sentiment was broadly positive as the US-China trade talks continued to make progress. In China, the government introduced initiatives to help bolster economic growth, freeing up an estimated 800 billion yuan of liquidity to support the flagging economy.

In Japan, the Bank of Japan continued with its easy monetary policy as growth remained slow.

Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 7.9% in January. Emerging markets outperformed developed markets The UK’s FTSE 100 returned 6.7% and Japan’s Nikkei 225 delivered 5.3%.

Turning to South Africa, equity returns bounced back in January with Financials and Resources driving the overall index into positive territory. Resources were supported by a growing demand for precious metals after the IMF downgraded its outlook on global economic growth. The SARB kept interest rates unchanged following a much-improved outlook for inflation, however warned that the outlook for domestic growth remains “sluggish” – downgrading its 2019 growth forecast from 1.9% to 1.7%.

The rand started the year on a positive note, retracing some of its losses from 2018. The local currency gained 7.7% against the US dollar, 7.3% against the euro and 5.4% against the pound sterling.

The FTSE/JSE All Share Index returned 2.8% in January. Resources delivered 3.3%, Financials 6.0%, and Industrials 0.9%, while Listed Property made an about-turn from its 2018 lows by delivering 9.2% for the month.

The average balanced fund delivered 1.6%, while the average low-equity fund produced 1.2%,

Adapted article by Pieter Hugo – Prudential Asset Managers

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