Since the first trading day of 2016 it was clear investors are in for a bumpy ride as a multitude of factors impacted investor sentiment and market movements around the globe. Three months into the year the full extent of this bumpy ride and why it requires a cool head to manage this is now very evident.
Brenthurst discussed investment scenarios for the remainder of the year at its recent seminar series host-ed in association with Investec. This is a summary of the presentations by speakers Magnus Heystek, Brenthurst Strategist and Director & Jeremy Gardiner, Director of Investec Asset Management.
According to Jeremy Gardiner we are going through a ‘everything the markets can throw at us phase’.
About 70% of what South Africa’s markets are experi-encing is due to investor sentiment towards emerging markets and 30% thanks to issues of our own creation.
“SA scored two own goals in 2015 – the so-called ‘Nenegate’ disaster and the visa debacle. However, the country is not bankrupt and its financial institu-tions especially remain strong. All emerging market economies are experiencing strain but it will improve in the next three years,” Gardiner said.
He noted that the USA is recording economic growth but nothing too fantastic. He estimates US growth for the year to be around 2 to 2.5%.
Recent global market events led to a strengthening of the US dollar, which hurts that country’s exports.Factors that will affect the US economy in months and years ahead include the decline of the middle class, disruption caused by the fourth industrial revolution and also the rapid development of robotics.
On the other side of the world Europe is not doing too brilliantly either. “Growth is slowly returning to Europe but the total debt situation of many countries remains a worry. A hardening attitude towards migrants and the challenge of integrating them into communities is beginning to show.”
As far as China is concerned Gardiner said ‘nobody really knows’. “There is a lack of transparency and the absence of communication makes it difficult to say with certainty what the situation in China is.”
Looking to the future he listed the worst drought on record, rising food prices, GDP growth of below 1% and the strong likelihood of extended strikes, espe-cially in the mining sector, as contributors to a year of economic pain in South Africa.
He noted the recent co-operation between business and government to at least discuss issues including economic growth and strategies like privatisation as a positive and added that SA’s debt as a percentage of GDP is ‘not that bad’.
What to do? “Batten down the hatches and wait for the storm to blow over,” Gardiner concluded.
TURNING TO WHAT ALL THIS MEANS FOR INVES-TORS MAGNUS HEYSTEK SAID RECENT MONTHS HAVE BEEN DIFFICULT, VOLATILE AND AT TIMES DEVASTATING.
“SA equities have not performed well. Values are down for most investments. The local currency has been in decline for a long time. Since 1980 it has only weakened. In 2001 in particular a big dip was recorded but the currency did recover somewhat,” Heystek said.
For decades global factors had an impact on the rand but of late a political premium has added pres-sure on the rand. “The events of December 2016 caused a tremendous collapse of personal wealth. Added to that SA’s competitiveness is in FREE-FALL.
The biggest risks to wealth are the downturn of the commodity cycle, rising interest rates in the USA, a downturn in Europe and China and locally a shrinking tax base.”
REGARDING INVESTMENT RETURNS OF THE PAST FIVE YEARS IT IS CLEAR THAT INVESTORS WHO MOVED MONEY OFFSHORE FARED SIGNIFICANTLY BETTER THAN THOSE WHO REMAINED 100% INVESTED IN THE SOUTH AFRICAN MARKET.
“FOR THE FIVE YEAR PERIOD FROM MARCH 2011 TO MARCH 2016 THE JSE ALL SHARE INDEX DELIVERED A RETURN (IN RAND) OF 86.6% WHILE THE MSCI AC WORLD INDEX RECORDED 178.7%.
FOR THE THREE YEAR PERIOD FROM MARCH 2013 TO MARCH THIS YEAR PARTICULAR SECTORS STRONGLY OUTPERFORMED THE JSE. THE JSE ALL SHARE RETURNED 39% FOR THIS PERIOD COM-PARED TO 151.7% FOR THE FRANKLIN BIOTECH FUND AND 133.9% FOR THE FIDELITY GLOBAL HEALTH CARE FUND.”
Measured in US dollar the picture is pretty much the same, despite the weakening of the rand.
“For the past five years the S&P500 delivered a return of 61.4% in dollar terms and the MSCI AC World Index 23.9% compared to -18.6% for the JSE All Share Index,” Heystek said.
THE LOOMING DOWNGRADE HAS DOMINATED NEWS FOR WEEKS AND WILL HAVE A
SIGNIFICANT IMPACT GOING FORWARD. WHAT WILL THIS MEAN?