Sequoia Capital Monthly Newsletter February 2019

FEBRUARY 2019 | ISSUE 02

MONTHLY NEWSLETTER

Economic Report During February global economic indicators continued
to indicate that the world economy is still in a healthy
More in this issue: state and signs of an imminent recession are absent.
Most developed economies had published their GDP
Brexit growth rates for Q4 2018. The US Federal Reserve once
Selected financial market again had indicated that the possibility for aggressive,
indicators if any increase in its bank rate this year seems to be
dim. Domestically the SONA by President Ramaphosa
as well as his first budget speech by the Minister of
Finance Mr. Mboweni were mostly welcomed by
foreign investors. The spike in load shedding by Eskom
however had contributed to the Rand exchange rate
to depreciate strongly. This had a profound negative
effect on bond rates and listed property shares.

Although most emerging economies still suffers from
rising U.S. rates, a strengthening dollar and lingering
trade tensions that left them nearly defenseless in
2018, most of these countries maintained fiscal
discipline, setting them up for solid growth as the
headwinds subside. The prospects of a further
slowdown in US growth with EM re-accelerating
means EM earnings growth should exceed that of the
U.S. in 2019 after lagging in 2018.

South Africa

The expected improvement in an economic upturn of the South African economy
now becomes more and more dependable on the ability of the government to
manage the Eskom dire straits situation. The unreliable electricity delivering services
to the country plays a pivotal role in foreign investment sentiment and is the key
towards further downgrading or not by the rating agencies. The proposed
unbundling of the State-Owned Enterprise as well as avoiding further load shedding
will play a major role in the movement of the Rand exchange rate for the rest of the
year. This became a reality during the middle of February as the first and very serious
load shedding of the year had contributed towards the Rand exchange rate losing
almost 100 cents against the $US as the currency traded for most of the month at
levels exceeding R14.10/$. Although it was announced by STASSA that the inflation
rate came down from 4.5% in December to 4.0% in January, the weaker Rand and
much higher oil price of near $66 per barrel is likely to increase the petrol price by
around 80 to 97 cents per litre at the beginning of March. The increase in the fuel levy
by 29 and 30 cents per litre for Petrol and Diesel over the next two months will also
impose a threat on the inflation rate and interest rates in months to come. Therefore
share, property and bond markets in South Africa will stay nervous and volatile,
although signs of some recovery on the JSE since the beginning of the year look
promising. Financial markets waits the announcement of South Africa’s GDP growth
rate this coming Wednesday 6 March 2018 to give some new impetus to sentiment.

USA

The USA economy seems to surprise everyone as the unemployment rate continues
to stay at record low levels, recording 4.0 percent in January. Economic growth had
subsided only slightly to 2.6 percent during the fourth quarter of 2018. The full year
growth was 2.9%, well above the 2.2% in 2017. Together with these positive
movements, the US inflation rate had recorded a low 1.6% in January. This much
lower than the average of 3.7% between 1920 and 2019. These developments
continue to push recession fears into the background and supports the Federal
Reserve’s stance that further increases in its bank rate for now are abstained.

ASIA

Economic growth will be slightly below-trend in most Asia-Pacific economies this
year as financial conditions tighten and global growth slows, according to Goldman
Sachs Research. The forecast also calls for fiscal policy to diverge throughout the
region—with Japan tightening significantly, and China and South Korea easing. Trade
tensions will remain a key source of uncertainty— and escalation of the US-China
trade dispute will continue to be a key risk.

+27(0)12 003 2979 | [email protected] | www.sequoiacapital.co.za
Spaces Building | 210 Amarand Avenue | Menlyn Maine

Sequoia Capital Management is an authorised financial service provider, FSP 49393

EUROPE

The Euro area still suffers under the uncertainty over the Brexit deal. The deal or no
deal is supposed to be finalised on 29 March 2019 with the UK scheduled to leave the
EU at 11pm. Various attempts to strike a deal between the UK and the EU that is also
acceptable for the UK parliament seems to have failed. The exit of the UK is expected
to have a negative effect on both parties. It is anticipated that economic growth for
the Euro area will dwindle downwards to 1.6% in 2019, down from 1.9% in 2018
improving the changes that the European Central Bank will continue to provide
stimulus to the area.

BREXIT

Everything you need to know about the
UK leaving the EU

It has been 2 years since the British public voted to the leave the European Union (EU).
The deadline is set for the 29th of March. What can we expect in these last 4 weeks?

What is Brexit?

Brexit is the term coined whereby the Britain will leave the European Union. The British public voted in 2016 to
leave the EU. After this vote the British Government had 2 years to negotiate the terms of their exit and more
important the future terms of trade between Britain and the EU.

What can we expect in March?

The initial agreement to leave the EU as negotiated by the UK prime minister, Theresa May was rejected
by the UK House of Commons on January 15th. The prime minister renegotiated the agreement and the
second round of voting on it is set for the 12th of March. It is expected that this agreement will be
rejected by the House of Commons. Where does it leave Brexit and the deadline of 29 March?

12 March 13 March 14 March

Vote – House of Commons to Vote – On this day the House of Vote – On this day the House of
vote on the renegotiated Brexit Commons will vote whether Commons will vote whether to
deal. there should be a “deal” or not. extend the deadline of the 29th
Outcome – If the “deal” is Outcome – If the answer is “No” March.
approved we proceed to 29 meaning that they do not want Outcome – If the answer is “Yes”
March with an agreement in a deal the UK will approach the the UK prime minister will
place. If the deal is rejected, we 29th without a trade agreement request an extension of the
move to a second vote on 13 with the EU and leave the EU. If deadline. If the answer is “No”
March. the answer is “Yes” meaning that the UK will approach the 29th
they want a deal, there will be a without a trade agreement with
third vote on the 14th of March. the EU and leave the EU.

+27(0)12 003 2979 | [email protected] | www.sequoiacapital.co.za
Spaces Building | 210 Amarand Avenue | Menlyn Maine

Sequoia Capital Management is an authorised financial service provider, FSP 49393

What do we expect?

The probability of the UK leaving the EU without an agreement is low. We expect that Theresa May will
request an extension of the deadline. The question is for how long the deadline will be pushed back. A
Short time frame might be more acceptable for the UK politicians and less positive for markets and the
consumer. Whereas a longer extension will be more appealing to markets and the consumer and less to
the UK politicians.

Selected financial market indicators
(in ZAR)

Disclaimer

This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised
or to any person to whom it would be unlawful to make such offer or solicitation, and is only intended for the use by the original
recipient/addressee.  If further distributed by the recipient, the recipient will be responsible to ensure that such distribution does not breach
any local investment legislation or regulation. Opinions expressed are current opinions as of the date appearing in this material only.  The
information is confidential and intended solely for the use of Sequoia Capital Management client’s and prospective clients, and other specific
addressee’s.  It is not to be reproduced or distributed to any other person except to the client's professional advisers. 
All data, models and tests are sourced from external data vendors or service providers unless otherwise stated thereon.  While information
obtained is from sources we believe to be reliable, Sequoia Capital Management does not guarantee the accuracy or completeness thereof. 
Save as may be provided under law, Sequoia Capital Management, does not accept any liability for inaccurate or incomplete information
contained, or for the correctness of any opinions expressed.  Prospective investors should inform themselves and take appropriate advice as to
any applicable legal requirements and any applicable taxation and exchange control regulations in the countries of their citizenship, residence
or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.

+27(0)12 003 2979 | [email protected] | www.sequoiacapital.co.za
Spaces Building | 210 Amarand Avenue | Menlyn Maine

Sequoia Capital Management is an authorised financial service provider, FSP 49393