Investment Environment August 2017


News flow, predominantly from secondary sources such as the media, has been negatively biased on markets calling for an equity correction. Some market commentators are also predicting an end to the positive markets. Fear tactics sells papers and at some stage markets will correct but Investors need to remember that volatility is areality, particularly for equity markets, but the dominant trend is up. if you have time, equity investment is the only way to generate real returns.

We had the privilege of attending a presentation by Kevin Lings of Stanlib, who has taken the trouble to go to actual data points to prove the published negative sentiment is not evident in the consumer and business sectors and is not demonstrable in the major economies. In fact, world growth is beautifully in syncand global trade volumes are significantly up. 

The confidence that we portrayed in the May Investment Environment has only improved as is shown in the graphs.

What is important to note is that confidence leads to better economics which in turn translates into better equity earnings. Furthermore the US is fully employed which adds to consumer confidence. This translates into happiness, as suggested by Lings, and in turn is fundamental to a good investment environment.

President Trump seems like a political bafoon and concerns emerge that he is undermining his chances of implementing the market-friendly reforms that were hoped for when he was elected. But as erratic as Trump is, his administration bounces back and although there have been many leadership changes, it might be emerge as strong as ever and remains market/ business friendly. There’s a current momentum as the Administration shows the political will to reform the tax legislation and potentially have this passed before year end.

Europe is in a similar situation with confidence back to high of 2007 (shown in the graph) and we persist with the idea that European equities have a place in USD portfolios to the extent of at least a 20% exposure. This is  justified on the basis of better value than US equities where valuations are more extended. For example the S&P500 PE = 21 and Nasdaq PE = 38 whereas German DAX30 PE = 17 and France CAC40 PE = 18. As Europe continues to show sustainable GDP growth above 2% and with the EUR moderate strengthening in the current year, such investments will add value in USD through both currency and share price performance.

There has also been considerable negative news flow on China which, as the second biggest economy in the world, is a very important factor. Critics of China say it is reliant on too much debt and credit risks could lead to a potential financial crisis. However, if one looks at the graphs Chinese confidence is at an all-time high and while the economy receded in 2016 the Chinese government has re-stimulated the economy in 2017 and the PMI indexes are well above 50 indicating an expanding economy.

What of South Africa? Unfortunately, as is shown graphically below, the South African economy is exhibiting low growth which is a consequence of poor consumer and business confidence which shows as the economy breaks away from World GDP trends. Sentiment is at a low ebb. This can be directly attributed to the shockingly bad political leadership. 

Notwithstanding this, there are some bright points such as the improvement in commodity prices which is being supported by the Chinese consumption referred to above. Generally, inflation is declining (July CPI 4.6%) and is now well within the Reserve Bank targeted bands, providing room for interest rates to decline which should provide some economic breathing space.

Douglas Investments continues to advocate USD portfolios holding a full weight of equities according to the given mandate, and some of that equity exposure can be achieved using a European diversification. In SA portfolios, we remain Rand hedge biased in our equity selections as the inverse movement between ZAR and USD interest rates will not bode well for the ZAR. As the year end ANC elective conference approaches, assuming it is not pushed out for political tactical reasons, some commentators placing a high probability (eg. Marianne Verwoed >70%) on a Zuma camp victory, this will be very negatively perceived. However, we must remain hopeful that things can change quickly in politics and any other outcome, other than the Zuma camp, will be a positive result!

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