Despite the turmoil and tragic events in Ukraine and The Middle East, global markets have held up exceptionally well recently. Having threatened to de-rail the global recovery, a spike in the oil price following the incursion of “ISIS” into northern Iraq, has so far failed to materialise.
Our local equity market remains buoyant and perhaps there is now a marked disconnect between the performance of our economy and the JSE. It is interesting to note that approximately 70% of the total earnings of our top 50 companies listed on the JSE are now derived from offshore activities.
Globally, neither the threat of inflation nor deflation seem of great concerns to central banks except perhaps, as regards the latter, the ECB. The general economic recovery seems to be firmly in place, hence the ongoing buoyancy in global markets. Despite this there are still concerns regarding the fragility of the recovery, particularly in the face of the inevitable but gradual normalisation of interest rates and the easing up of liquidity provided by various “quantitative easing” programmes which a number of central banks have been employing to stimulate lagging economies.
Markets are not necessarily overheated but valuations are generally looking stretched. This is particularly the case here in SA. A correction can be expected but when and what specifically could trigger it? A significant rise in interest rates, particularly in the US, would affect markets there and, as is normally the case, have a knock-on effect globally. However, the Federal Reserve appears to be keeping a very steady hand on the tiller – so far anyway. Despite this and although contagion is not expected, the Argentinian default on its debt repayments is a concern. Furthermore, the full effect on the Euro economy of Russian sanctions is most likely still to be felt.
Recently the Rand has shown some strength against major currencies. As usual this can be attributed to a combination of factors including the Reserve Bank’s decision to continue raising interest rates, primarily to combat inflation which at 6.7% is now, officially at least, outside the targeted range of 3%-6%. In pursuing this policy the Reserve Bank has a difficult task in avoiding what is known as “stagflation” – ie a stagnant economy with little or no growth accompanied by an inflationary spiral.
Nevertheless, South Africa continues to be a beneficiary of an inflow of foreign money seeking higher yields than can be obtained in the developed markets. This inflow has been given a boost by flows leaving Russia in the wake of possible further sanctions on that country following the tragic downing of Malaysian Airways flight M17 over Eastern Ukraine. Indeed the local currency has become one of the most sought after in emerging markets. Investors need to be wary though, this may not be the beginnings of a positive trend. The Rand remains one of the most volatile currencies and is always easy prey to changing economic data and trends as well as pure speculation.
