There has been much disbelief at the strength of the global equity rally so far this year. However, as summarised by IMF chief economist Maurice Obstfeld last week, the current global re-acceleration is more broad-based than at any time over the past 10 years. Indeed, the IMF upgraded its growth numbers for 2017 and 2018 to 3.6% and 3.7% respectively. Given also soft inflation, it therefore seems entirely reasonable to us that markets should have performed so well. Nonetheless, we would never have anticipated such low realised volatility (5.5% annualised for the S&P 500 over the last 12 months). This is bound to be contributing complacent positioning and underappreciated risk.
In Africa, South Africa’s appeal court upheld a ruling that 783 counts of corruption and fraud should be reinstated against president Jacob Zuma. The decision highlights the strength of South African institutions which have been uncompromised through Zuma’s tumultuous presidency and makes it more likely that the market friendly candidate (i.e. Cyril Ramaphosa) will emerge from the ANC leadership election in December. A Ramaphosa victory should see business confidence rebound from its historic low, encourage investment, as many South African companies will prioritise domestic over foreign investment. In the past these companies, with strong balance sheets and dominant market positions were investing elsewhere because of South Africa’s poor political environment. A change towards a business-friendly leadership at the ANC will begin the process of unlocking the potential of South Africa, which laid dormant during the past year’s due to its dysfunctional political environment. Global equity portfolio investors have zero to very low weighting to this market, which is characterised by highly profitable, pan-African leaders valued at multi year low valuations.
The Chinese national congress takes place this week (from the 18th).
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