Investors opt for rand and local bonds
LOCAL bonds and the rand, through carry trades, are likely to remain the preferred asset classes among investors with general equities under threat, warn analysts.
Carry trades refer to the practice of foreigners buying currencies in a bid to obtain higher interest rate yields.
Bonds have been the best asset class so far in 2016, delivering growth of 11.7%, followed by property stocks with 7.6% and other equities with 5.8%.
The rand has firmed 7.5% in 2016 against the dollar, shrugging off negative news such as Moody’s reviewing five stateowned enterprises for a possible investment downgrade.
Analysts say the market is awaiting this week’s US Federal Reserve rate decision with seemingly little attention being paid to other market developments.
But TreasuryOne dealer Andre Botha says it would be a mistake to underestimate the rand’s potential volatility. “The present thin liquidity can cause quite sudden shifts,” he said.
That was evident at the end of last week when it firmed to R14.10 to the dollar in risk-on trade on weaker US retail sales data, only to weaken again above R14.25 to the dollar in choppy trade from the previous close of R14.32 to the dollar.
Due to low GDP growth, shares with a local focus remain under pressure. But diversifying to South African companies with international exposure may not be wise, due to some high valuations among rand hedges.
“I am not sure local shares have yet fully priced in further shocks,” said Mywealth Investments CEO Devin Shutte.
The JSE is trading at an above average price-earnings ratio of 23, mainly through the sky-high valuations of some rand hedges, such as Naspers, trading at a price-earnings ratio of 105, but still punted as a buy by some investment managers.
The all share is still about 2,000 points away from its alltime high of 55,355 of April 2015. Shutte said a recovery in the all share may be in the offing towards the end of 2016 when greater clarity emerges about possible downgrades by the rating agencies, as well as more certainty about the position of Finance Minister Pravin Gordhan.
There appears to be very little value among the top 10 shares on the JSE. Banks and financials, at price-earnings ratios of 10.4 and 12.6 respectively, are relatively attractively priced, but are expected to bear the brunt of any further shocks.
It may be a bit premature to climb into SA Inc stocks now as … we are in a low conviction environment
“It may be a bit premature to climb into SA Inc stocks now, as returns are squeezed and we are in a low conviction environment,” Shutte said.
But the tide may be turning for SA Inc shares, and the rand remains key.
Old Mutual Investment group economist Johann Els says a low US interest rate cycle, a stable-to-weaker dollar, an improved Chinese economy and stable economy prices are all contributing factors to the stabilising rand.
A stronger rand should support SA Inc shares, but Els warned this was based on the assumption that a potential ratings downgrade had already been priced in and political upheavals were avoided.