Local market ready to ride out the storm
• Outlook is good, despite recent tumult, writes Andrew Gillingham
SA is going through some turbulence at the moment and markets tend to react to today’s news and historic information becomes less important than immediate information.
Herman van Velze, head of equities at Stanlib, says every few months there is another event that moves markets to the upside or the downside and present conditions will be overtaken by these events and all but forgotten.
“Every few months we will have another change in direction and the build-up to the year-end political adjustment is likely to be a greater shift. In economic terms the die has been cast for the rest of the year,” Van Velze says.
He says there is also some positive news feeding into the outlook. The prospects for inflation look benign as some of the macro factors are working in SA’s favour.
UPTICK
There has been an uptick in gross domestic product that is likely to continue.
“Agriculture is improving as a consequence of the better rainfall. Commodity prices are up across the board and mining companies are increasing their capex spend.
“There has been a small increase in volume output from miners. And, there is less demand for imports from consumers. The seasonal impacts we are experiencing will be positive for the country.”
This all mounts up to good conditions for the local market.
“The local industrial and financial market is not expensive today once you take out a high flying share such as Naspers,” Van Velze says.
He says the impact of the ratings downgrade by the credit rating agencies will be negative initially but experience with other countries that have been through a similar situation shows that the effects tend to diminish in time.
Therefore, Van Velze says a number of mainstream companies with single-digit P: Es will become attractive to investors going forward.
“There are sectors which show promise such as the food producers who will gain significantly from the current expectations in the market.
“The financial sector is trading at attractive long-term averages and once the ratings adjustments are fully digested interest in the sector is likely to return,” he says.
Another sector with a positive outlook is commodities. “China is looking in a lot better shape than we expected for this year and commodity prices are being driven by robust world demand, particularly for better quality materials and especially for iron ore,” Van Velze says.
Another developing trend is the use of passive funds as an integral part of a well constructed portfolio.
Janina Slawski, director of marketing and distribution at Old Mutual Investment Group, says as so much of returns are driven by “beta” the normal market performance, there is a strong move internationally by investors to put their money into passive funds so that they can benefit from the lower costs associated, in general, with indexation, namely exchange traded funds and other passive vehicles.
“The idea is that you might as well get cheap beta by investing into an index and invest the balance at the margin to get some active alpha,” Slawski says.
“However, following this strategy can result in missing out on some of the ‘in between’ asset opportunities. A multi-asset manager will look at the overall market and identify what specific assets it should be getting exposure to given the manager’s outlook in areas such as exchange rates and interest rates.”
TIMING
She says timing is an approach that many investors are tempted into trying at some stage of their investment life cycles but all too many find that even the experts fail when trying this strategy.
“Investors should be wary of the temptation to ‘time’ the market, such as waiting for a market correction to invest in equities or going into cash because of uncertainty.
“When you are nervous and you put your money into money markets is often the time when the markets rebound and you are on the outside looking in,” she says.