Below please find Ashburton’s view on the local and offshore markets. It is always helpful to get an overview of the markets.
Market overview, asset category assessment and asset class return expectations – October 2014
Global equity markets came under pressure over the month against a backdrop of weak Chinese data, a struggling European economy and on-going European deflation fears. In addition and notwithstanding continued positive economic momentum in the US, slowing house price growth and slightly lower consumer confidence readings combined with higher bond yields to produce a further headwind for equities over the period.
In China industrial production grew 6.9% y/y in August, down from 9% y/y in July which represented the weakest growth since 2008. In the Eurozone the composite Purchasing Managers Index fell by 0.2points to a nine month low while inflation fell to a five year low of 0.3% y/y
On the local front equity market performance was negative over the period with the resources sector being a relatively poor performer (notwithstanding a weaker rand) on the back of falling commodity prices. Gradually rising bond yields also provided a further valuation headwind for local equities. On the economic front indicators were mixed. On the negative side mining production was weak as the effects of the platinum strike continued to linger while manufacturing production also recorded its largest slide in almost 5 years following industrial unrest in the metals and engineering industries. Trade performance was also disappointing on the back of a 9.6% month on month decline in exports and a 1.4% rise in imports. On a more positive note new vehicle sales increased substantially on demand from the rental industry, retail sales rebounded and the business confidence index increased. The monetary policy committee of the SA Reserve Bank opted to leave rates on hold given a more benign inflation outlook and a weaker domestic growth outlook.
Market Outlook
The outlook for the domestic economic environment unfortunately remains poor and a sub- par economic growth expectation is likely to continue to prove challenging for corporate earnings especially in those areas that are consumer and interest rate sensitive. Notwithstanding recent equity market weakness, local equity market implied risk premiums remain below long term average levels, which, together with an expected upward drifting bond yield is likely to remain a constraint for near term equity returns.
An expectation of higher long bond yields is likely to dampen returns from both the bond and listed property markets in the near term. A large current account deficit and resultant reliance on foreign capital inflows suggests the currency remains in a relatively fragile state. Offshore investment continues to retain investment merit.
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