Investment Environment August 2016

09.09.16

Following our July report on the aftermath of BREXIT, it would appear that world markets have calmed down and are currently in a state of “steady as she goes”. There seems to be no doubt that without exceptional news flow, the US market as indicated by the S&P500 index (below) has broken out of the long period of consolidation and moved to a higher level but awaits “justification” from the Federal Reserve. There is an irony in this, as if the FED indicates sufficient economic strength to raise rates, markets take a “risk on” approach on the basis of better forward looking economics. On the other hand, like most good economists, if the FED indicates a stall on interest rate increases, markets continue to take the risk on approach due to the lack of available yield and continue to hold risk assets / equities to try achieve some returns. We obviously cannot say that markets are not going to be subject to volatility going forward, as that is the very nature of equity investment, but for the time being the US market is consolidating around a higher level which, after the January start, should be most welcome.

The advantage of investing in US equities is staying in the USD and avoiding currency risk, particularly in light of the Eurozone remaining fragile and less predictable.

The South African equity market is undoubtedly expensive on a P:E 23 but is very widely rated with industrial Rand hedges being highly rated and resource stocks very poorly rated. The reason for this is the industrial Rand hedges are beneficiaries of the weaker Rand. Unfortunately, the JSE is marking time based on the political contest of good (Gordhan) vs bad (Zuma) which is a reflection of the expected economic outcome depending on who wins. This thesis expects SA to be economically better off and avoid a debt downgrade in December if Gordhan is allowed to do his job. We sincerely hope this will be the case and continue to hold equities of a Rand hedge nature.

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