Citadel advisory partner and chief economist Maarten Ackerman says global equity markets, especially in the US, have enjoyed upward trends after the financial crisis of 2008/9, until recently.
He notes that while economic growth around the world in 2018 was sound, leading to solid company earnings, markets bucked the trend, decoupling from the stable economic fundamentals. Ackerman anticipates weaker times ahead.
“While the long-term bull market remains intact for now, the pullback in global markets does signal weakness. Most economies will still deliver reasonable growth during this year.
“There are headwinds facing global economies in 2019, with geopolitics playing a major role. Brexit, for example, is already in uncharted territory and will certainly be messy, while populism is taking hold in Europe. In France, the ‘yellow vests’ have thrown the country into turmoil, and the US-Sino trade war remains unresolved. However, there remains capacity for positive growth in 2019.”
Ackerman adds that, although the Chinese economy is already slowing down, the authorities are planning for stimulation to support it and engineer a soft landing. Such a move would be positive for emerging markets, which are reliant on a “healthy China”.
Meanwhile, South Africa is exiting a technical recession, with the political administration slowly making headway in turning the economy around. However, a high unemployment rate, value-added tax at 15% and rising interest rates prevail.
Ackerman says much will be on hold until after the May 2019 national election. He notes the attention of politicians will be focused on issues such as land expropriation without compensation, service delivery and State capture.
“We are unlikely to see any meaningful progress towards economic policy reform until the African National Congress party receives a solid mandate from voters to enable government to concentrate on the business of governing.”
Ackerman adds that the South African economy retains its extensive structural defects and holds many challenges, from an excessive debt burden, to a floundering power supplier.
As far as financial markets are concerned, Citadel foresees a year of greater volatility on the back of the heightened geopolitical uncertainty, as well as the outside chance of a bear market.
“Against this backdrop, we are following a defensive strategy for 2019. We have increased the amount of shock absorbers, such as hedge funds, protected equity and defensive stocks, being held in our portfolios and we are reducing exposure to sectors that are vulnerable to market volatility.
“At this stage, we view global equities as offering better prospects than South African counters, especially in Europe and Japan,” states Ackerman.