Over the last year, policy divergence among the largest economies has been reflected not only in their own economic performance, but also in that of other economies. A worsening trade environment is likely to exacerbate these divergences, and is a material risk to growth going into 2019. The global cyclical upswing reached its two-year mark and the pace of expansion in some economies appears to have peaked. The synchronised global growth is long gone, leaving domestic demand as the key driver. IMF global growth forecast for 2018 was projected at 3.9% in April this year, however, they will be revising this figure in October.
We are at the stage of the policy tightening cycle in advanced economies which has contributed to the build-up of financial vulnerabilities. In this peculiar setting, history suggests a higher likelihood of accidents in financial markets and recent events support this view where markets buffeted by negative headlines from Italy, Turkey, Argentina, and broader emerging markets. Although, there are some idiosyncratic risks, they are being magnified by a persistent and steady Fed tightening cycle and the European Central Bank (ECB) slowly phasing out their Quantitative Easing (QE) program.

Going into autumn, the United States (US) economy expanded at a solid 4.1% over the second quarter of 2018 and 2.9% year-on-year (y/y). Bolstered by pro-cyclical policy, the US labour market is nearing full employment, consumption is robust as wage growth picks up, and investment continues to be boosted by tax cuts, regulatory reforms, and fiscal spending. The confluence of the robust private and public sector has put the US growth on a divergent path from that of the global economy. Across the Euro-zone, growth remained steady in the second quarter of 2018 at 0.4%, while y/y growth declined to 2.1%. The European Commission noted that their aggregate measure of consumer and business confidence declined to its lowest level in more than a year during September. Additionally, all of the economies in Europe will be negatively affected by rising oil prices, persistent geopolitical uncertainty, impacts of Brexit, poor fiscal discipline in countries such as Italy, ongoing trade tensions and the shift to the populist right. However, growth projections remain strong for the area driven by countries such as Germany and the hope that the EU and UK will strike a deal for Brexit.

While the US and other advanced economies are still growing, the short-term concern in the global economy is centered in emerging countries where the growth divergence is becoming more evident. Countries such as Turkey, Argentina, Indonesia and South Africa are suffering from outflows of money, depreciation of their currency and therefore an increase in the burden of foreign currency denominated debt creating a challenging environment for the region.

As emerging markets have come under pressure in recent month amidst continued tightening of US monetary policy, growing noise and action around global trade policies and specific risks in specific countries, South Africa, with its relatively open capital account and twin current account and fiscal deficits, has not been spared.

South Africa entered its first recession in the second quarter of 2018 since the global financial crisis of 2009. Although the external vulnerabilities are seen as a source of macroeconomic risk, South Africa’s latest balance of payment data was encouraging. The seasonally adjusted current account deficit narrowed markedly to 3.4% of GDP in the second quarter of 2018 from 4.6% of GDP in the first quarter. This was driven partially by an improvement in trade balance strengthening to 1.4% from a decline of 3.9% in the first quarter. Beyond the third quarter, current account dynamics will be driven fundamentally by the strength of foreign demand and the export commodity prices on the one side and by the strength of domestic demand and Brent crude oil prices on the other.

Following the relatively poor economic performance, President Cyril Ramaphosa announced that the government has formulated stimulus package focused on the reprioritisation of government spending and economic reform. However, there remain difficulties for government to reprioritise spending away from the relatively unproductive labour intensive organs of state and we expect a marginal impact to this shift in spending. In October, we look forward to the Medium-Term Budget Policy Statement (MTBPS) which will dictate the tune until February’s Budget and Moody’s Rating Agency review for South Africa. Although, the probability of a rating downgrade is minimal, Moody’s has warned that SA’s debt metrics and SOEs (stateowned enterprises) are key risks, and can lead to a change in SA’s rating. A strong recovery in GDP growth will be difficult to achieve given ongoing constraints on the consumer and persistently weak business confidence.

The demand for South African office space is linked to confidence and the employment outlook, which is going to take time to recover. In the industrial sector, the requirement for supply chain efficiency remains a positive driver of demand for logistics space while shopping centres that are appealing destinations or offer convenience are better positioned to grow their trading densities and rentals in a more competitive environment. Our portfolio takes into consideration the risks related to the listed SA property sector and our funds are well positioned due to our focus on quality, value and diversification which include a significant exposure to inward listed REITS with high quality portfolios based in developed markets.

The Oasis Property Equity Fund provides investors with the opportunity to invest in property related companies that are listed on stock exchanges in South Africa. It maintains an actively managed portfolio that relies on independent research that is conducted by the investment manager. To reduce the level of portfolio risk, it is diversied across a range of different property types that would include of high-quality residential and commercial properties. In addition, the portfolio is also diversied across various geographic regions to limit exposure to any specic regional area.

The global economy entered 2018 with a synchronised upswing firmly underway, driven by improving manufacturing output, trade volumes and commodity prices. In January 2018, the IMF upgraded its forecasts further and now expects global economic growth to firm to 3.9% in both 2018 and 2019, after 3.6% in 2017, a pace comfortably above the 3.2% recorded in 2016, when there were widespread concerns over secular economic stagnation. The synchronised global economic upswing has led to narrower output gaps and, together with higher oil prices, has provided the basis for reflation. However, inflation increases have remained measured suggesting some economic 'slack' is still prevalent in key economies. From 0.8% in 2016, the IMF projects inflation in Developed Markets will average 1.7% in 2018 and 2.1% in 2019, in line with most central bank's target levels.

Against the backdrop of US economic upswing, the Federal Reserve has raised the Funds Rate six times since December 2015, each by +25 basis points, to reach 1.75% in March 2018. The improving job market has supported growth in disposable income and helped underpin consumer spending. A series of tax cuts have been implemented with a view of boosting investment and employment. As things stand, the plans are unfunded and will over the long-term add significantly to the fiscal deficit.

The global economy faces a number of key risks. Most importantly, the normalisation of monetary policy in developed markets, in particular the US, may cause a faster than expected tightening of global financial conditions, which could impact market valuations and increase market volatility. Steps by President Trump to add tariffs on steel and aluminium imports has led to corresponding steps by the Chinese authorities, leading to fears of an escalating 'tit-for-tat' trade war. Finally, China's high level of corporate indebtedness and lack of transparency on local government balance sheets also poses a key risk to the domestic economy and, by extension, the global economy too.

The South African economy has continued to perform well below its long-term potential given domestic headwinds from corruption, poor governance within the State Owned Enterprise (SOE) sector and uncertainties around the political landscape. The election of Cyril Ramaphosa as National President in February 2018 will be looked back on as a pivotal moment if he is successful in tackling deep-seated corruption and introducing growth-supportive economic policies. The 15% appreciation
of the Rand since the ANC's National Conference in mid-December shows a vote of confidence by financial markets. If Ramaphosa is able to fulfil these expectations, the stronger Rand will improve inflation outcomes by protecting the economy from rising oil prices and provide scope for the South African Reserve Bank to maintain an accommodative monetary stance.

Fiscal tightening measures announced in the February 2018 Budget, which included an increase in the VAT rate from 14% to 15%, will provide a headwind of around 0.5 percentage points to GDP growth. While the fiscal tightening and the more market-friendly Ramaphosa administration led Moody's to retain its investment grade rating and placing South Africa on a stable outlook, risks to the rating outlook remain should economic growth disappoint over the coming year. The current account deficit may have reached its narrowest point in 3Q 2017 with higher import volume growth stemming from a recovery in economic activity. In this respect, a decline in terms-of-trade is a key risk for South Africa's external position at the current juncture.

South African shopping centres that are appealing destinations or offer convenience are better positioned to grow their trading densities and rentals in a competitive environment. In the industrial sector, the requirement for supply chain efficiency remains a positive driver of demand for logistics space. The demand for South African office space is linked to confidence and the employment outlook, which is going to take time to recover. Our portfolio takes into consideration the risks related to the listed SA property sector and our funds are well positioned due to our focus on quality, value and diversification which include a significant exposure to inward listed REITS with high quality portfolios based in developed markets.