Download December 2016 - SecureWealth

Quarterly Commentary
December 2016
We wish all our clients the very best for 2017
Brexit and Donald Trump’s U.S. presidential election victory were the biggest events for
markets in 2016.
At a glance:
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South African Rand: The Rand rebounded 14.13% in 2016 against the USD – after
a poor run the year before.
JSE/FTSE: The JSE was up 2.14% for the year. It has now returned 6.25% per
annum for the past 3 years.
Allan Gray: We had a tough 2016, after a record 2015. Allan Gray/Orbis realised
some decent USD returns offshore, helping offset some of the Rand’s gains.
Coronation Fund Managers: The Coronation Global Emerging Markets fund was
flat for the year and we are not unhappy with that considering the Rand’s rebound
against almost all other currencies. The more conservative strategy, which has a
large weighting in USD cash, was down 5.83% for the year.
Franklin Templeton: We had a reasonable year – we are overweight the cheaper
Emerging Markets, and recently added some gold exposure to our portfolios. We
also bought into South Korea, whose market trades at valuations not seen since
the 1998 Asian financial crisis.
Investec Wealth: Our Investec portfolios are overweight USD cash and this
impacted on their performance for the year. We will be reviewing the Investec
accounts shortly – with a view to putting some of the US Dollars to work.
ABSA Stockbrokers: Once again, exposure to the US Dollar affected the
performance of our Absa Stockbroking accounts.
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Popular Opinion and The Markets
We read for hours every day, listen to many experts and the analysts, hear what the
mainstream media have to say and it seems that everyone is always so knowledgeable,
confident and sounds so very convincing. With this in mind, it is very easy to go through
patches where you doubt your investment decisions and positions.
Just prior to the American election, this was the popular opinion among the experts and
in the mainstream media: “Hillary Clinton will win the election by a landslide, markets will
thus be stable, but in the highly unlikely event that Donald Trump wins, both the
markets and the US Dollar are at risk of a collapse”. Furthermore, this is how the
influential New York Times predicted the election a mere 8 hours before the polling
stations opened:
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And here is how the US market reacted after Donald Trump became the most divisive
and unpopular President-elect in American political history!
And the US Dollar Index hit 14 year highs against its major competitors. So much for
the popular opinion and the experts!
Unbelievably, in the first month or so of being elected, Donald Trump has had the most
positive effect on American financial markets out of all previous US Presidents.
The lesson learned: To try and base investment decisions/a portfolio on the mainstream
media or popular opinion is absolutely fraught with danger.
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Additionally, more money has flowed into US equity based funds than ever before.
Expensive shares became more expensive, in a classic case of investors chasing the
shares that were going up the most, irrespective of the price they are paying for
dividends and future earnings. We have seen this countless times before. Investors flock
to the asset class that is the most popular – which ultimately leads to poor returns.
Emerging Markets lost some ground in light of the election result, which afforded us an
opportunity to increase our exposure to some of the cheapest markets in the world.
Emerging Markets
We prefer the cheaper Emerging Market shares to their more expensive Developed
Market peers.
One of the major reasons why Emerging Markets have under-performed in the last 5
years is that the Federal Reserve in America began tapering its QE programme some
time ago and more recently actually started to raise interest rates. Many believe that
America is behind the curve and that interest rates will rise higher and faster than
expected.
If one can strip out the noise (extremely difficult in this day and age with access to
information readily available in the mainstream media/on your smart phone/on social
media), you will note from the graphs below that Emerging Markets actually did
extremely well in the last two hiking cycles by the Federal Reserve of America. This is
contrary to popular opinion at the moment and although there is no guarantee that it
will happen again, the charts below certainly do not lie.
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The first of another set of charts below illustrates that, between 2000 and the middle of
2004, the South African market gave poor returns and investors had to endure four
major corrections over 5 years. The red down arrows clearly indicate this. How many
investors were patient enough to persist through this period?
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The second chart below is just a continuation of the first chart. The SA market went up
200% over the next 4 years, from 2004 to 2008. Our guess is that many exited the
market and missed out on the 200% gains.
Source: INET Bridge
Source: INET Bridge
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The primary reason why the market produced those extraordinary gains was because
shares were extremely cheap – they traded at an average Price/Earnings ratio of 8. The
average PE ratio is now closer to 16. Exactly the same principles apply to the markets
we are finding attractive right now: They have not performed for 5 years plus, they are
dirt cheap and we believe some exciting times lie ahead.
South Africa and the Rand
South Africa is an Emerging Market – so why are we not as confident in South Africa as
we are with regards to the prospects in China, Brazil, India, South Korea and Asia?
Firstly, we explained above that the South African market has had a great run and now
trades at a historically high average PE ratio (and not so with the markets that we find
attractive other than India). Additionally, here are some of our concerns:
1. GDP growth is far higher in the Emerging Markets we prefer
2. Unemployment in other Emerging Markets is not as high as in South Africa
3. South Africa has twin deficits – and that is normally a negative in a rising interest
rate environment
4. Political instability in South Africa. Brazil and South Africa have had similar
challenges over the past couple of years. Brazil impeached their President in 2016
on corruption charges after the country had fallen into a recession. The Brazilian
market and currency, the Real, were possibly the worst performing assets in the
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world up until the impeachment. Both the currency and the markets have since
rebounded. Has South Africa seen the worst? Or do we too have a leadership
crisis ahead of us?
The South African Rand has rebounded strongly against all currencies as well as gold in
2016. Very seldom does an asset class or a currency go up or down in a straight line.
Thus, a rebound was probably due. The high that the Rand made against the USD, after
a 20% rebound, actually occurred in August 2016. Since then the Rand has not made
further progress against the USD as you can see from the chart below. The study of
charts is called Technical Analysis and while we do not profess to be experts in this field,
even an untrained eye can see the ceiling or resistance that has formed in the USD/ZAR
chart (the horizontal red arrow). If the Rand breaks through that ceiling, then we can
expect it to appreciate further to a higher level.
Source: INET Bridge
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Source: INET Bridge
Above there is a chart of the Rand/Gold price. Here too the Rand has rebounded 20%
against the price of gold since the bottom in 2016.
Previously, in 2009 when the Rand had fallen precipitously, the Federal Reserve in
America started its QE programme (or looser monetary policy) which ultimately proved
very positive for the Rand. Presently, the Federal Reserve has not only abandoned its
QE programme, but is actually tightening monetary policy. The circumstances now are
therefore vastly different to 2009 both economically and politically, since South Africa
also did not have the political infighting prevalent in the ANC that we have now.
Interestingly, the Rand is ranked 18th among the most traded currencies in the world,
with 1.1% of world trade. Not surprisingly, the USD is ranked 1st with 80% plus of world
trade. In 1998 the Rand was ranked as the 10th most traded currency, but has now
slipped to 18th, due largely to the rise of other Emerging Market currencies over the past
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18 years. Additionally, a Bank for International Settlements (BIS) Report identifies that
the US Dollar accounts for a huge 85% of the entire Rand market.
So, in trying to make sense of the volatility in the currency markets, I ask myself one
simple question as a South African:
“Would I rather own the South African Rand at present levels to protect my wealth,
or the US Dollar?”
I do not have a shadow of doubt that I would prefer to store my wealth in the world’s
most traded currency, the US Dollar.
Reporting and Investment Statements
We will be improving our reporting and investment statements to our clients from end
of March.
Thank you for your continued support.
Kind Regards
Mike Carruthers
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SecureWealth (Pty) Ltd is an authorized financial services provider, License Number 6148.
Nothing contained herein is or should be construed as advice given or received.
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