2017 has been a turbulent year for investment markets. Global geopolitical risks were heightened by North Korea threats, Donald Trump’s maverick approach, the Middle East hostilities, and the UK and Europe confused about a future relationship. Locally, politics has ‘ruled the roost’ culminating in a watershed ANC national conference starting this Saturday.
The turbulence resulted in the SA equity market fluctuating significantly in 2017 as it tried to recover from a previous three-year period of only 3% growth per annum. To date, the JSE All Share Index is up 13% in 2017, which included some big ups and downs – as much as 8% per month. This was further abetted by a volatile Rand/Dollar moving to a low of 12.46 and a high of 14.47.
The JSE up thanks to Naspers
Global markets have broadly recovered this year with the World MSCI Equity Index up 18.4% and Emerging Markets equity up 28.8%. This is after three dismal years of returns +2.1% p.a. and -3.2% p.a. respectively. The JSE All Share Index followed suit, up 13% this year thanks to Naspers (the largest share on the JSE) up 74%, most of which was achieved over the last five months.
The recovery in global markets is largely due to improved global economic growth across most regions including continued strong growth from China.
The South African economy has remained weak as political disruptions continued to hamper growth. This has largely been reflected in the underlying poor performance of the JSE this year. When stripping out Naspers’ 74% appreciation, the All Share Index (excluding Naspers) is only up 2% year to date.
Further analysis shows that Naspers has been the major driver of the JSE over the last four years, up 240%. When stripping Naspers out of the JSE All share Index, the index is up only 1.7% p.a. over the last four years, mainly reflecting the poor growth and future prospects of the country.
Waiting for the ANC conference outcome
All eyes are on the ANC’s national conference starting this Saturday (16 Dec). Notwithstanding personal preferences in terms of individuals, stronger economic policy and unbiased fiscal planning are imperatives for SA to restore strong growth into the future. The options are a ‘Positive Outcome’ (Ramaphosa is elected as the new leader of the ANC) or a ‘Negative Outcome’ (any other result). The probability of a Positive or Negative outcome appears to be 50/50, which is what the market appears to be pricing into our shares and the currency, which is currently at 13.61 to the US Dollar.
Currently, our investment portfolios are well balanced to benefit from either a positive or a negative outcome.
The Rand is poised to move!
The Rand has been volatile this year, with a low of 12.46 and high of 14.47 to the Dollar. The price has tracked the local political events, but overall it has been flat, and the price is exactly where it was one year ago. Our portfolios have remained balanced between local assets and offshore as we believe that the long-term trajectory of the country is still uncertain. This “balanced” approach has paid off as investors who took their money offshore at the wrong times would have suffered losses caused by the Rand strengthening.
Our view is that the Rand is likely to strengthen or weaken by 10% over the next six months, depending on a positive or negative outcome to the ANC National conference.
Moody’s is waiting to downgrade us to Junk
Two weeks ago, Moody’s decided not to downgrade us to Junk, unlike their counterpart S&P that did. Moody’s has been more patient as a positive political change (Ramaphosa elected as the new ANC leader) could make a material impact on much needed economic changes, which would avert a downgrade in the short-term.
The Steinhoff Shock
Like most portfolios, Investonline’s recommended portfolios had varied exposure to Steinhoff. Our aggressive portfolio had a gross 2.2% exposure, mainly through the Coronation Top 20 Fund. The rest of our portfolio exposures were negligible at less than 0.5% and hence had a minor negative effect.
The collapse of the Steinhoff share price from R56 to R6 in a week is very unusual and has not happened to a large cap share before. It’s embarrassing for the country and a disgrace, not to mention the impact on many innocent investors who have lost money. Blame is being placed in many different areas and the whole truth might not ever be revealed.
Our understanding of the company’s collapse is that CEO, Markus Jooste, hid company debt in companies that he secretly owned. As a result, the overall debt of the company became too big to repay.
So far, we believe that most of the blame will be placed on Jooste as he lied and concealed material information from the company and its auditors. As an analyst, I had a few one-on-one meetings with Jooste. He was smart, confrontational and intimidating and hence could get away with unanswered questions.
The collapse has led to a contagion of other related shares, such as Shoprite (down 12%), STAR (down 54%), KAP (down 12%) and PSG (down 13%). The investment lesson here is to ensure your portfolio is adequately diversified and not too skewed to one share, sector or theme.
Investment Themes for 2018
Locally, a lot hinges on a positive or negative ANC conference outcome. Positive outcome: The Rand will strengthen well below 13 to the dollar and SA economic-driven sectors such as banks, retailers, property, construction and general industrials, will rally. Negative outcome: The Rand will weaken well above 14 to the dollar and the SA economic sectors will decline/stagnate. The Rand hedge shares will rally with a weaker Rand.
Globally, risk management is going to be key. General equity valuations are stretched at a time when interest rates are rising. This is not a good combination. Although there is an overall improvement in global economic growth, there is a long list of risks: Geopolitical tensions, China consumer debt, US government debt and many unresolved key trade agreements. We believe that there are pockets of value in emerging markets, development market stalwarts and selected commodities such as platinum.
Investment Strategy
The outcome of the ANC National Conference next week will shape our investment strategies going forward. Our portfolios are currently well balanced to benefit from either outcome, but we will move to more selective local assets if the conference results are positive and to more selective offshore assets if the results are negative.
Managing risk will remain critical. Investors need to ensure that your tolerance for risk is matched to a portfolio that is properly balanced to provide a reasonable return, but can protect you against the different market risks.
It’s tempting to “get up and dance while the music is playing” i.e. blindly riding the markets higher. We caution investors to rather “choose their songs to dance to more carefully” and take a more pragmatic approach going into 2018. Rather enjoy more measured returns with the view to preserving capital that can be used for safer growth as opportunities arise.
Investonline Year
Investonline has had another successful year as we have again materially grown our assets and client base. Key to our success is the ongoing training and education of our team. Learning is the cornerstone of our business as it enhances the value-add service to our clients.
We’ve invested in more staff and embarked on upgrading our information and management systems. With the latest investment and financial planning tools we can ensure that we can provide our clients with the best investment solutions at the most affordable prices.
We continued to meet various portfolio managers, political analysts and offshore investors during the year ensuring that we remain close to the pulse of investment markets.
We look forward to another successful year of ensuring that our clients have the best financial plan that provides them with the most suitable investment strategy for their particular needs.
For your financial planning and investment advice needs please contact us.
