Surg­ing ahead in 2015

Finweek English Edition - - INSIDE - Th­ese were his com­ments on spe­cific sec­tors:

South Africa is up against a host of struc­tural prob­lems, but it doesn’t all amount to gloom and doom for in­vestors. On the con­trary, 2015 may even be a bet­ter year than 2014, but with the like­li­hood of gen­er­ally lower in­vest­ment re­turns.

That’s the view of Peter Brooke, head of the Macro So­lu­tions bou­tique at Old Mu­tual In­vest­ment Group. His team puts a con­sid­er­able amount of work into its an­nual five-year fore­casts.

The good news, he ex­plains, com­prises the oil ben­e­fit, likely fewer strikes, stronger con­sump­tion spend­ing growth, bet­ter GDP growth, cur­rent ac­count im­prove­ment, a more sta­ble rand, lower inf la­tion, a bet­ter fis­cal sit­u­a­tion, and a sta­ble mon­e­tary pol­icy.

He con­cedes though that elec­tric­ity sup­ply re­mains the big­gest risk.

“Three years ago the big story was to take as much money off­shore as pos­si­ble and buy eq­ui­ties. I wouldn’t bang t hat drum as hard to­day. In terms of di­ver­si­fi­ca­tion, we still place a pre­mium on off­shore eq­ui­ties, but if you have a lop­sided port­fo­lio where there’s too much off­shore ex­po­sure, you could be run­ning a risk.

“I f you’re in­vested in a typ­i­cal do­mes­tic bal­anced fund with Richemont, Bri­tish Amer­i­can Tobacco, Naspers* and alike, prob­a­bly 50% of your money is al­ready driven by global fac­tors.” Brooke says that his team has gen­er­ally cut ex­pected re­turns for 2015.


“South African eq­ui­ties can be ex­pected to gen­er­ate a 5% per an­num av­er­age real re­turn over the next f ive years, which is slightly lower than our ex­pec­ta­tions last year, only half the f ive- or 10-year his­tor­i­cal f ig­ures, and way off the longterm (since 1925) real re­turn of 8.1%.

“The very strong re­turns in the re­cent past have made the mar­ket ex­pen­sive and that’s the chal­lenge fac­ing in­vestors. JSE mul­ti­ples rel­a­tive to the global mar­ket are on the high side.

“We’re also con­cerned about profit growth of SA eq­ui­ties, neg­a­tively af­fected by lower trend GDP and the head­wind from lower com­mod­ity prices.

“Our long-held theme of ‘China in tran­si­tion’ and the sub­se­quent favour­ing of Naspers over re­source coun­ters re­main in place, as does that of a ‘ lowre­turn world ’. In a low-yield world eq­uity still of­fers the best yield.

“Late last year we in­creased ex­po­sure to con­sumer shares, although some re­tracted quite sharply. Cur­rently, we’re fo­cus­ing on shares with good div­i­dend yields, although they of­fer much lower than his­tor­i­cal re­turns be­cause val­u­a­tions are higher. Fi­nan­cials with their high

div­i­dend yields look in­ter­est­ing.”


“Although it has r un hard in re­cent years, we still re­tain a neu­tral po­si­tion on it be­cause of its on­go­ing po­ten­tial to ben­e­fit from the macro en­vi­ron­ment, es­pe­cially the lower oil price, im­proved con­sumer en­vi­ron­ment, and the lower cost of cap­i­tal.

“The is­sue is price – it has been the best mar­ket per­former for sev­eral years, driven largely by rerat­ing and lower yields. We have cut av­er­age ex­pected re­turns by 75 ba­sis points to 4.5% per an­num for the next f ive years.

“His­tor­i­cal data shows that the sec­tor re­turned 20.3% nom­i­nal last year, an an­nu­alised 15.5% over f ive years, and an an­nu­alised 14.6% over 10 years.”


“In our pre­sen­ta­tion last July we said that the big story for the sec­ond half of 2014 would be SA bonds and that proved true. They’re ben­e­fit­ting from the sur­prise po­ten­tial im­prove­ment of the do­mes­tic econ­omy and cur­rently have one of the high­est yields in the world on both a rea l and nom­i­nal ba­sis. They’re par­tic­u­larly at­trac­tive for for­eign­ers seek­ing, say, 7.5% nom­i­nal.

“Long bonds can be ex­pected to de­liver an av­er­age real re­turn of 2.5% over the next f ive years.”


“We are over­weight this sec­tor. Bet­ter growth and easy liq­uid­ity should pro­vide a much-needed fil­lip to global eq­ui­ties.”


“In South African cur­rency terms, global bonds did well last year, which helped our bonds. But given the record low yields, we re­main neg­a­tive on them for the medium term. They gen­er­ated a 10.5% re­turn in rand terms for 2014 and 0.7% in US dollar terms,” says Brooke.

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