Get set for a long hard winter
GLOBAL equity markets faced headwinds in 2015 and, given the strength of the US dollar, most bourses struggled to achieve positive returns when measured in dollars, according to Daryll Owen, deputy-chief investment officer at Foord.
“The tech-heavy Nasdaq 100 index rose 9.7 percent for the year, eclipsing almost all other exchanges including others in the US (the stimulus-induced Japanese Nikkei rose 10.5 percent) says Owen.
“The index of emerging markets (-14.6 percent in US dollars) was decisively negative, with exchanges in Brazil, Turkey and South Africa suffering significant losses in US dollars amid an emerging market rout ignited by fears of slowing Chinese growth.
“Led by the large non-resource rand hedge shares, the FTSE/JSE All Share Index rose 5.1 percent in rands for the year, but declined by 21.5 percent when measured in dollars given the rand’s capitulation towards R16/$ by year-end.
“Oil and precious and industrial metals prices slumped again as the commodity supply glut continued. The US finally commenced interest rate normalisation, which communicated the Fed’s confidence in the stability of US GDP growth.
“In contrast, Europe and Japan embraced stimulus. Long bond yields ticked up in almost all markets, ex Japan. Many emerging markets, including South Africa, were forced to raise interest rates pre-emptively in a vain effort to protect their flagging currencies.”
Owen says in South Africa, the rand weakened against the key developed market currencies by between 17 percent and 25 percent in the past 12 months.
“South Africa’s twin deficits, which re- duce the credit quality of South African securities, have persisted for some time. However, in past years, foreign portfolio flows into the South African equity and bond markets tempered the impact of these deficits on the extent of rand depreciation.
“Looking forward, the global economy should continue its gradual growth path, if somewhat unsteadily at times.
“In the US, much improved employment numbers, nascent wage growth and the improving housing industry should drive global growth to approximately 3.0 percent for 2016.
“The European economy is expected to continue to gain traction, benefiting from the stronger US economy, weaker euro and the low oil price.
“In China, robust, but slowing, economic growth is adding to global volatility as that economy transitions from an infrastructure- to a service-driven economic model,” reports Owen.
He contends that as the US normalises interest rates, bonds and equities of all emerging economies, South Africa included, become less attractive.
“The absence or reversal of foreign portfolio inflows, coupled with continued high deficits, will leave the rand extremely vulnerable to further weakness unless South African bond yields also rise. We therefore hold a cautious view on investing in bonds at this stage of the interest rate cycle.
“Cash is unlikely to deliver significant returns after inflation, but unlike in previous years is more likely to be positive given the outlook for additional interest rate increases in South Africa.
“Given the risks to appreciable real returns on cash and bonds, Foord’s preferred asset class to achieve inflation-beating returns in the medium term remains equities, most notably foreign equities,” says Owen.
From a bottom-up perspective, Foord’s prudential portfolios typically have a full permissible allocation to foreign assets, especially foreign equities, according to Owen.
“The unconstrained Foord Flexible Fund of Funds holds 70 percent in equities, most of which are domiciled abroad.
“All of the Foord portfolios are positioned to benefit from investment in good quality companies with strong balance sheets, good cash flows, proven management teams and solid dividend yields. Exposure to commodity companies remains limited,” says Owen.