Investment Environment August 2013

30.09.13

Notwithstanding leading economic indicators surprising on the upside and reinforcing the idea of economic recovery, markets are ending the quarter on a weak note. The GDP growth achieved in the US as a result of the expansionary monetary policies is in stark contrast to the Euro area where austerity measures have been followed. There are also other indicators such as the Euro area and Chinese PMIs also surprising on the upside.

These improved economic circumstances are providing room for interest rates to move up, whether that be the market interpretation of the FED tapering bond repurchases or simply monetary policy. High interest rates pose an immediate risk for equities. The equity markets have also suffered as a result of the tensions over potential military action against Syria. Markets have reacted with the dual effect of pushing the oil price, implying higher energy costs, and a recovery in the gold price as investors use it as a safe haven “currency”.

The circumstances in South Africa appear to be even more tense due to the rolling strike actions that plague both the mining and industrial sectors of the economy. This has had a knock on effect of making South Africa a less favourable destination for international investment flows which is reflecting in ZAR weakness. Emerging markets are generally suffering from capital flight. The currency weakness is not only as a result of our political issues, but structurally set due to the trade account deficit. Furthermore, the graph below shows a dramatic turn-around in SA interest rates, particularly at the long end as shown by the 10 year bond yield.

So where to with all the bad news coinciding? While geopolitical tensions and the prospect of war cannot be ignored, DI are of the view that the weakness in equity markets should be taken advantage of as it is fundamentally backed by good economic data. If the markets continue to weaken, SA equities which have an international orientation can be bought. There is a benefit in buying such equities, as they also act as a Rand hedge. The conclusion is that it is a time to be bold and see past the immediate circumstances, taking advantage of share price weakness and buying good quality companies.

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