Investment Environment April 2018

16.04.18

U.S. stocks tumbled by 2% to 3% on Monday 2 April and the remainder of the week was volatile but with some recovery. This “correction” occurred after China raised import duties on U.S. pork, apples and other products. This was in reaction to the US administration announced tariffs on high-tech Chinese imports worth USD50-60bln The US Trade Representative (USTR) is to produce a detailed list of products, and in scope will likely be 1,300 products which are in sensitive areas such as aeronautics, new energy vehicles, modern rail, and others. The list of sectors targeted is the list of sectors from the Chinese government's "Made in China 2025" initiative launched in 2015.

Markets are under stress and vacillate between “risk-off/on" as the world economy becomes dislocated due to the imposition of tariffs which is being viewed as a potential trade war. Technology companies took some of the worst losses probably exacerbated by the incredible run and therefore extended valuations in 2017. The Facebook debacle has also cast a shadow on tech stocks.

It's too soon to call it the beginning of a trade war, but investors are sensitive on a daily basis as news breaks. What about value? P/E’s which are considered a general valuation criteria and US stocks have been valued down to post Brexit values (P/E’s) – see the graph above. The P has declined significantly since February 2018 and the E has risen steadily throughout 2017 bringing the P/E into value territory. Hopefully Investors will start looking to take on this good value.

The US economy remains strong and corporate results have been strong and are expected to remain good with the tailwind of tax cut through 2018.

The strength of the ZAR (ZAR/USD 11.50-12.00) is impacting the JSE which is naturally Rand hedge biased to the extent of 62%. Fortunately, the global rating agency Moody’s Investor Services left SA’s credit rating unchanged and provided some relief in moving the outlook from negative to stable. This, together with the political outlook, seems to be underpinning the Rand. Apart from the currency, the JSE remains very correlated to international events, particularly in the current volatile circumstances.

DI continues to invest SA portfolios in large cap stocks, but has introduced some pure SA mid caps to benefit from the improved SA outlook without the negative effect of the ZAR. Internationally, DI remains positive on the US markets with a limited exposure to core Europe, but there is no doubt that 2018 will continue to be extremely volatile.

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