Investment Environment January 2016


Equities got off to a very bad start in 2016 as shown by the US S&P500 index which after 3 weeks was down 7.7% and nearly 13% off the May 2015 high to more or less the same level as the end of August. The culprit is China (as it was in August and September of 2015) where continued currency depreciation and equity market volatility in Shanghai unnerved global markets. The Renmimbi is raising questions regarding the Chinese economy particularly since the mid-August currency de-pegging to the USD, causing a depreciation of 6% versus the USD.

On equities, the Shanghai Composite suspended trading early for the second time the first week of 2016, as the 7% circuit breaker on the CSI 300 was triggered just 30 minutes into Thursday 7 January trading session. Chinese equities continue to resemble a casino but the effect on global markets is profound as shown in the S&P500.

Bears (people viewing the markets negatively) view the recent Chinese currency depreciation as a sign that growth in China is slowing more than originally thought, and that a further depreciation of the Renmimbi could spark a currency war that would prove harmful to global growth. While we believe a currency war is unlikely, it does highlight how out of sync the world is! The US has probably seen the bottom of the interest rate cycle with the FED confident enough in US economic growth to raise interest rates in December, albeit only 0.25%. While a weak Renminbi will help Chinese exports particularly to the US, where the USD is rampant compared to any currency in the world, it does raise questions regarding the Chinese economy and the shifts away from investment and manufacturing toward consumption and services. A weak Renminbi does not provide any hope for commodity prices as energy and commodities become more expensive for the world’s largest importer, China.

So what is in store for 2016 as the year starts with weak markets and emerging markets, with South Africa or the JSE firmly in the latter category. China is being sighted as the main reason which, when combined with even weaker commodities prices, it is difficult to be positive about this year’s prospects. Combine these global events with the Zuma unadvised Finance Minister shenanigans in December which has made the ZAR weakness virtually systemic, and probably a new floor or normal has been established. In this fateful first month of 2016 the ZAR/USD slumped to its weakest point ever touching ZAR18/USD. This reflects foreign disinvestment, weak commodities and some USD strength.

If one is in any doubt as to the political effect on the ZAR, a fair comparison is to the AUD which is a similar resource based emerging market currency. The graph probably tells it all. 

In August 2015 when the Shanghai market collapsed it proved to be an opportunity for global equities and current circumstances may be a recurrence. As a portfolio manager one can't just withdraw and give up, so where to from here? We remain convinced that clients should take what USD (or Forex) exposure they can as bounces or points of some strength occur. To the extent this is not possible, we advocate the use of Western Market equity index trackers, this might be opportune with the current weakness in equities, and using the non-commodity Rand hedge listed stocks that have large proportions of their business exposed to international markets.

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