Year ahead offers a chance for nimble investors to thrive
Diversification remains the key amid a gloomy outlook
WE’RE in for another tough year from an economic perspective — and although the markets don’t look much better, there are still opportunities for astute investors to make money.
Economic predictions for 2016 are that we’re in for more low growth.
Goolam Ballim, chief economist at Standard Bank, predicted that the global economy would be relatively stable during 2016, albeit functioning at a lukewarm level.
“The US economy will reflect the same resilience it has shown the past few years, while European growth will remain tepid,” he said.
He predicted that Africa will see 4% growth, although the Chinese economing ic slowdown will negatively impact commodity-centric economies such as Zambia and the Democratic Republic of Congo.
Similarly, markets dependent on oil would be impacted by Opec’s strategy to reclaim market share, resulting in low oil prices in Nigeria and Angola.
There just did not seem to be any proverbial rabbits left in the hat to brighten the domestic economic outlook, said Azar Jammine, chief economist at Econometrix.
“Any further money stimulus could be very detrimental.”
Despite strong growth over the past decade in emerging markets such as China, India and, until recently, Brazil — which created a significant shift in spending power — growth in these markets is starting to slow down and will in all likelihood continue to do so next year.
However, according to Peter Worthington, senior economist at Barclays, developed markets are showing signs of recovery again, specifically the US and eurozone, which has resulted in a cyclical shift in spending power back to these markets, in spite of a long-run structural shift in spending power towards emerging markets.
China’s slowdown has had a huge effect on the South African economy, both directly and indirectly.
“Iron ore exports to China represented major growth for the South African mining industry, but as demand has fallen, so the price has plummeted, which in turn could knock production offline,” said Worthington. “South Africa is not one of the cheapest suppliers of iron ore, so, with less demand, the industry could take a knock as importers look to cheaper suppliers.”
There’s also downward pressure on other commodities, including coal, which is good news for local users such as Eskom, but bad news for local coal producers.
China’s slowdown will continue to affect South Africa’s neighbouring countries.
“South Africa needs its neighbours to be doing well,” said Worthington.
“But our neighbours have also been impacted by decreased demand for commodities and the regional drought, and this is impacting their currencies.”
Consumers would continue to remain cautious, he said.
“Credit growth is subdued and lendis standards are tightening. Confidence levels are low and people are not rushing to buy durable goods or discretionary consumable goods and services.”
South Africa’s economic vulnerability was highlighted by the balance of payment current account, which reflected the country’s dependence on foreign trading to drive the economy, said Ballim, adding that he expected this to remain a construct for the foreseeable future.
“It’s crucial that South Africa enlivens its export growth. To some degree, the weak rand should help rebalance South Africa’s marked trade deficit.”
South Africa might have avoided a technical recession, but concerns were mounting over next year and beyond, said Old Mutual Investment Group chief economist Rian le Roux.
“The global macroeconomic environment isn’t very supportive of South African growth.”
An increased risk of ratings downgrades as a result of a slower-thanexpected fiscal consolidation is not helping the economic outlook.
“The public sector wage deal has consumed the contingency reserve for the next three years,” said Worthington. “This means that any unanticipated fiscal need, such as drought disaster assistance, university fee freezes and potential needs of stateowned enterprises places more pressure on the budget.
“The fiscal constraints are exacerbated by weak growth.”
On the positive side, the economy was not showing signs of complete collapse, as it threatened to do in 2008, said Jammine.
“There are glimmers of positivity. The domestic manufacturing sector — while still fairly weak — showed a small increase in September and, while jobs are being lost, it’s more of a slow puncture than a haemorrhage.
“The drop in the rand should benefit tourism next year and to an extent is acting like a shock absorber and giving South Africa a modicum of competitiveness.”
From a market perspective, 2015, with its overriding theme of low market returns, is a fairly good indication of what can be expected for the year ahead.
“To a certain extent it feels like we’ve had a disastrous 2015, but in spite of that there have been opportunities to make money,” said Peter Brooke, Old Mutual maximum return fund manager and boutique head.
“Funds have outperformed cash and inflation.
“We’ve seen some big winners and some big losers during 2015.
“While China’s slowdown has been bad for commodities, the US economy growing and the dollar strengthening.”
The big themes driving the market next year would be very similar to those of 2015, Brooke said.
“The current environment of low growth and low inflation is a trend we expect to see continuing into 2016. Countries will continue to respond to the global economy in different ways: as the US market strengthens, they will hike rates, China will lower its rates and Europe will continue to print money in terms of quantitative easing.”
Expect another year of low returns, but with dispersion there is an opportunity to make money.
“Japan’s equity markets, for example, did very well in the past year. Similarly, if you hedged your investments in European markets for the currency, then you delivered excellent returns. We expect that trend to continue,” said Brooke.
Offshore equities will remain the preferred equity class, he predicted.
“Investors need to be looking for growth and while equities are unlikely to blow the lights out, on a comparative basis to bonds they will deliver an acceptable return. Diversification remains an important long-term savings strategy.”
Those countries that have good fiscal policies in place and are performing will continue to do better than those under fiscal pressure, like Brazil, which was hard hit this year in terms of bond markets, which saw it downgraded to junk status.
This is important for South Africa as it needs to deliver reforms to avoid junk status.
Brooke said there was a very real risk of being downgraded by credit ratings agencies such as Standard & Poor’s in 2017.
Although the returns in 2016 won’t be exciting, predictions are that they will be available.
“It’s an environment that favours stock picking, more concentrated portfolios and companies that can deliver
The drop in the rand should benefit tourism next year and is acting like a shock absorber While jobs are being lost, it’s more of a slow puncture than a haemorrhage.
growth irrespective of the economic climate,” said Brooke.
His advice to investors: stick to a plan and focus on saving as much as possible.
“Ideally, you want to be in a diversified fund that offers opportunities to move between different asset classes.
“Your portfolio should include some offshore assets, especially offshore equity. Pick the right shares rather than focusing on the broad market.”
Despite the tough environment, there are always opportunities to find investments that will deliver the right returns.
“You want exposure to investments that can grow irrespective of the global downturn and deliver annual earnings growth,” he said.
Jammine agreed that diversification was the only logical option for investors.
“Gold and property are both relatively safe bets, but in a sluggish economy the latter won’t be showing any great returns. Cash could be an option as long as the government does not abandon fiscal responsibility as it’s being pressured to do, plunging the currency into crisis and encouraging high inflation.”
The bottom line appears to be that nimble and astute investors could potentially outperform the market — but that’s a tall order and, as long as you don’t lose money, you’re doing pretty well.