Brace for market volatility
SURVEY WARNING: FUND MANAGERS REMAIN BEARISH ON EQUITIES
Gold the least preferred of resources; in financials, banks are the most preferred.
Fund managers remain uncertain of broad equity performance in 2019, according to a Bank of America (BA) Merrill Lynch survey on fund manager sentiment entitled Commodity Bears and More Hawks.
Although South Africa’s economic growth is projected to pick up marginally in 2019-20 driven by exports and private consumption, many remain uncertain of equity performance because of higher global oil prices, a weak exchange rate and an emerging market selloff, which has pushed inflation to the upper half of the 3% to 6% target range of the SA Reserve Bank, the survey states.
“Growth is very subdued in SA so we say the rallies are unlikely to be sustained beyond the first half of the next year,” says John Morris at BA Merrill Lynch.
“The US yield curve is growing flatter and that leads volatility by about three years. So, we think over the next year or two we will have elevated volatility.”
On a 12-month view, fund managers preferred financials to industrials, with general mining being the preferred entry into resource equities. Gold is the least preferred of the resources. Within financials, banks remained the most preferred.
In the industrials sector, tobacco led despite potential spillover risk from regulatory reform in the US, which plans to tighten limits on the amount of nicotine.
Banks gain traction, miners and consumers lose ground
For diversified JSE mining stocks, 2018 has ushered in heftier bottom lines and a relative commodities recovery, with BHP Billiton, Glencore, and African Rainbow Minerals up over 150% over the past three years.
Despite the advances on the JSE Resources Index, the fund manager survey showed that managers sold local equities in favour of industrials, cash and property. Offshore managers, on the other hand, sold bonds in favour of equities and repatriated cash.
Fund managers remain bullish on banks, tobacco and general miners stock, while real estate, gold, and healthcare remain shunned sectors.
“Financials gained over general mining and consumers [general retailers and food producers],” reads the survey.
Inflation looms
“A higher 83% of managers surveyed expect an improving economy and a higher 92% expect inflation to be higher over the next 12 months,” says Morris. For the first time this year, managers expect two hikes. “Around 90% say the next repo rate move will be up, in Q1 [first quarter] 2019, but the 12-month dollar-rand forecast weakened to R14.33 and the 10year bond yield rose to 9.45%.”
Commodity bears amid cash hoarders
Managers remain bearish on equities in a 12-month window, with commodity stocks fuelling the negative sentiment.
Increased pressure on emerging market options and rising interest rates in the US have driven many managers to hedge their positions, with cash offering the perfect hedge.