Investment Environment May 2016


On Monday 30 May the JSE Share index was at a record high, but with the desperate start to 2016 few would have believed it, particularly toward the end of January when the index hit a point of maximum pessimism! The equity market has since rebounded dramatically.

The big drivers were the Industrial Rand Hedges and the biggest weighting is attributed to Naspers that makes up 13.20% of the ALSI, followed by SAB Miller that weighs in at 13.16%. We are delighted with the performance of these shares as they are the heaviest weightings in most of our portfolios. The undoubted weak spot has been the Resource Stocks as indicated by BHP Billiton, that remains almost 50% below its record 2014 high. One assumes that, one day, we will wish that we had the foresight to buy these resource stocks at book-to-values of 50% of their market capitalisation, which currently indicates they would be better broken up. 

On the evening of Friday 3 June S&P maintained the debt rating of South Africa at triple BBB-, but with the caveat of a negative outlook. This gives the country a reprieve until December, but as Pravin Gordhan has been stating, we must be very careful to avoid complacency and much needs to be done to address the concerns (e.g. slow economic growth, government debt, social cohesiveness, and public corporation expenditure) of S&P by December. The S&P assessment of South Africa was not all negative and we need to build on the compliments such as the capacity of the public protector, independence of the judiciary, government reforms curtailing expenditure, reserve bank independence and not least of all the free press!

The ZAR/USD anticipated the status quo on the debt rating and strengthened further subsequently to the announcement. While this was predominately ZAR strength the moves also related to USD weakness. This is probably a window of opportunity to exchange ZAR for hard currency. 

Internationally there is no doubt that the US equity markets are leading the way. Significant economic figures continue to show improvements in the US, although simultaneously to the S&P debt rating (referred to above) the US released poor job data. This was countered by Janet Yellen stating that the economy is still strengthening and that the gradual increase of interest rates is likely. Our expectation is a maximum of 2 rate rises through to the end of 2016 each of 0.25% (at total of 0.5% in 2016). The assumption that the FED will take this benign approach is because the rest of the world is in recovery and continues to be supported by Central Bank monetary policies. The FED approach is therefore, likely to be, an effort to normalise the low interest rate environment but avoid destroying growth. 

All of the above has translated into a strong USD, which will probably continue to remain so and more likely put pressure on emerging markets. However, notwithstanding the USD, commodity prices are edging up, most notably Oil, which is currently at +/- $50 and hopefully will continue to rise to the long term forecast of USD+/- $65. The oil price also supports the fact that the US economy is robust and leading the way.

Our conclusion remains to continue to use as key portfolio constituents, the Industrial Rand Hedges that are beneficiaries of a weaker ZAR and also participants in other economies. We also continue to encourage clients to take advantage of the foreign investment allowances (FIA) to establish true international portfolios that are hard currency based. We have platforms that such portfolio accounts can be established and managed on, in the same way as any South African portfolio.

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