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Investors were able to breathe a sigh of relief on the back of a firm Phase 1 trade agreement between the US and China, as well as a decisive Tory election victory in the UK that paved the way for a less-uncertain Brexit.These events helped to improve sentiment towards global growth in 2020, as did the backdrop of easy global monetary policy, sparking a strong global equities rally. South African markets benefitted from the bullish mood, which outweighed largely negative local developments: both local equities and bonds delivered positive returns and the rand gained ground against all three major currencies.
South Africa
Positive global investor sentiment lifted South African equities and the rand in December, helping to offset more negative developments locally. The surprise resumption of load-shedding in December and the possibility of it extending well into 2020 exacerbated the weak growth outlook, leading many analysts to expect a recession. Meanwhile, November CPI fell to 3.6% y/y, a nine-year low. Despite the subdued inflation environment, the SARB’s latest model is forecasting no further interest rate moves through 2020 and 2021, a view reflected in the forward rate market. The central bank has been emphasizing the importance of anchoring inflation expectations at or below the 4.5% midpoint of the SARB’s 3-6% inflation target, rather than boosting growth, thereby putting more pressure on the government to enact reforms and a fiscally responsible 2020 budget.
United States
In the US, the Phase 1 trade pact with China averted planned new US tariffs on another $160bn of Chinese products set to take effect on 15 December. Among other concessions, China pledged some $400 billion in tariff cuts on 859 types of products starting 1 January. In the face of brighter growth prospects, the Fed left interest rates on hold as expected, and its December “dot plot” forecast pointed to no changes through 2020 and one 25bp rate hike in 2021. The central bank also noted that the US economic outlook was favourable as it went into 2020 with moderate growth (GDP at 2.1% y/y), historically low unemployment (at 3.5%) and inflation under control (at 1.7% y/y in November).
UK and Europe
In the UK, the Tories won PM Johnson’s snap general election by a significant majority, setting a clear path toward Brexit on 31 January. Still, many terms will take months (or years) to agree, which will continue to hinder investment. The UK equity market and pound sterling rallied on the added certainty, with the FTSE 100 returning 5.3% in December and 22% for the year in US$.
In the Eurozone, the European Central Bank (ECB) is projecting growth at 1.2% for 2019, 1.1% for 2020 and 1.4% for 2021. Christine Lagarde, the ECB’s new President, kept interest rates on hold at its December meeting and confirmed that its bond buying stimulus programme had re-started on 1 November.
Asia
The Chinese economy continued to slow during the month, hurt by the trade war’s negative impact on Chinese exports and manufacturing. Adding to the slowdown were the ongoing democracy protests in central Hong Kong targeting popular shopping areas, which weighed on consumer spending and tourism, sending the territory into a rare recession. The government’s ongoing stimulus measures, including tax cuts, infrastructure spending and lower bank reserve requirements, have helped to cushion the broader economy, but December saw increasing pressure on the central bank to initiate further monetary easing.
Japan’s growth also continued its deceleration as its export-driven economy was hit hard by the US-China trade war and weak business and consumer sentiment. The Bank of Japan left its key interest rate on hold at -0.1% in December, but signalled it could implement more stimulus measures should its sales tax hike dent consumer spending.
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