To improve this growth outlook, three things are needed:
Inflation outcomes have surprised on the downside for most of 2019 and the outlook remains benign. The South African Reserve Bank (Sarb) has cut rates by 25 basis points to 6.25% to boost consumer demand; however, the impact of this rate cut on economic growth is negligible.
There is still room for more cuts but the risk of credit rating downgrade from Moody’s keeps the Sarb cautious. The credit rating downgrade is largely priced in by financial markets such that the impact on asset prices will likely be limited. However, the macroeconomic adjustment, following the downgrade to sub-investment, is usually painful and lasts for a very long time depending on the speed and extent of policy response.
Global asset class returns have performed relatively well in 2019 compared to 2018. Developed market equities, driven by US equities, outperformed emerging markets and local equities. Global bonds underperformed other global asset classes, which is a reversal of 2018 market dynamics where bonds performed better than equities.
Domestic equity markets performed in line with emerging markets but domestic economic issues capped the performance. Resources, largely the gold and platinum sector, performed well, while financials had poor returns.
The longer term trend has seen moderating returns, which is the low investment return theme we have highlighted over the past few years. However, for 2020, emerging markets equities appear cheap and with stronger fundamentals. In similar fashion, domestic equities also appear cheap, which should benefit investors who have added holdings of local equities in their portfolios. Local bonds also continue to offer attractive real yields, particularly in an environment where global bonds offer negative or close to zero yields.
