Download March 2017 - SecureWealth

Quarterly Commentary
April 2017
“The two most powerful warriors are patience and time.” – Leo Tolstoy
Apologies:
Firstly, our sincere apologies – our new investment statements are not ready. Producing an accurate
statement in a simple, easy to read format that appeals to all clients, as well as incorporating the different
management houses, currencies, shares, exchange traded funds/notes, asset classes and regions, is
proving
to
be
a
lot
more
challenging
and
time
consuming
than
we
expected.
Markets at a glance:
1.
South Africa: Standard & Poor’s and Fitch downgraded South Africa’s credit rating in light of the
cabinet reshuffle by President Zuma.
2.
South African Rand: The Rand was just 2.3% higher against the US Dollar and flat against the
British Pound this past quarter.
3.
JSE/FTSE: The JSE is up 3.78% year to date including dividends.
4.
Allan Gray: We had another tough quarter, while experiencing some positive effects from
President Zuma’s decision to dismiss Pravin Gordhan.
5.
Coronation Fund Managers: The aggressive Coronation Global Emerging Markets Fund had an
excellent quarter. The more conservative strategy, which has a large weighting in USD cash,
rebounded after the political decisions by President Zuma – but was still negatively affected by
the stronger Rand.
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6.
Investec and ABSA Stockbrokers: All our Investec and ABSA portfolios are overweight USD
cash, and were therefore also held hostage by the resurgent Rand.
7.
Franklin Templeton: Our US Dollar Franklin Templeton portfolios hit all-time highs.
South Africa
The big news of the quarter was the dismissal of Pravin Gordhan and a host of other ministers by
President Zuma in a major cabinet reshuffle. The Rand has slipped nearly 12 percent since March 27 when
President Jacob Zuma recalled then-finance minister Pravin Gordhan from an international roadshow
before firing him later that week.
Despite the loss, the Rand still trades well above its lows of 2016. Please see graph below.
Courtesy: INET Bridge
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We have absolutely no idea where the Rand is headed – but the actions of President Zuma confirm our
worst fears. We feel there is significant risk in holding certain South African assets, other than Randhedged shares with a global footprint. It should however, be borne in mind that on aggregate, roughly
half of the JSE’s Top 40’s profits are made outside of South Africa. However, most South African assets
are still historically expensive in our opinion.
To exacerbate the situation we find ourselves in, interest rates in South Africa are at multi decade lows
as well. Please see the chart below.
1985
1998
There is a common misconception that the South African Reserve Bank determines the interest rate.
They only set the interest rate – ultimately the market (and investor confidence) determines our interest
rate. We need look no further than the interest rate shock we experienced in 1985 – see chart above – at
the time of the infamous Rubicon speech and the Asian crisis in 1998. I am sure many of you do not need
reminding. No central banker would hike interest rates so aggressively, unless the market forced his
hand.
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The Reserve Bank recently stated that "the risk is that the rand could follow a more depreciated path
than expected, which would, other things being equal, raise inflation". Furthermore, after a prolonged
period of quantitative easing (printing money), the US is now in an interest rate tightening cycle.
Additionally, the president of the Peterson Institute for International Economics, Adam Posen, has told
the Telegraph that "The Fed is going to be far more aggressive than people think. Our view is that there
will be three to four more rate rises this year," This would be a negative for a commodity dependent
economy like South Africa.
Political uncertainty and credit downgrades certainly do not help. If this local crisis has legs and foreign
investors lose confidence in South Africa as an investment destination, there is a strong likelihood that
interest rates could rise rapidly.
Lastly, our in-house stockbroker Johan Calitz, points out that South Africa is one of the most
economically unequal societies in the world and that unless something is done to address the
unemployment and education crises, the situation is unlikely to improve. Unfortunately, President
Zuma’s decisions are probably going to affect those who least can afford the ramifications of the latest
developments: The poor. This would exacerbate the gulf between the haves and the have-nots, further
fuelling the flames of discontent.
Factoring in all the risks above, South Africa may well be on the cusp of a perfect storm. One can only
hope, that the uncanny ability of South Africa to always rise to the occasion to address her challenges
will be echoed in the current situation we are facing now. In the meantime, we continue to tread
cautiously with an overseas bias for all our clients and by extension our business. Nothing we have seen
in the past couple of weeks gives us any reason to change that approach.
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Franklin Templeton
Franklin Templeton, one of the largest and most respected asset managers in the world, houses the bulk
of our USD portfolios. Franklin Templeton is listed on the New York Stock Exchange with a market
capitalisation of $23 billion. We have had a very successful relationship with them since 1996. The main
reasons why we support them are that: We can invest in their funds or strategies at no upfront charge,
we enjoy same day pricing and we have access to almost every asset class in a diverse range of regions
throughout the world.
I am pleased to report that after a lean period of underperformance – our portfolios are reaching all-time
highs in USD terms. This is owed to being overweight emerging markets, which have outperformed
developed markets over the past 15 months. One of our largest holdings, the Templeton Global Bond
Fund, has also rebounded nicely since its lows of last year (see chart below). As I alluded to in the
September commentary last year, patience is one of the most important qualities an investor can have.
Courtesy: INET Bridge
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In the following section, we raise concerns about equity valuations in America. Despite the decent
performance in our USD portfolios, we remain extremely vigilant - markets have a habit of making you
look extremely foolish when you least expect it.
American Markets
There are numerous valuation metrics investors use to determine the value of a share or an asset. My
favourite metric is the Shiller P/E Ratio. Below is a chart of the top 500 shares in America. It quite clearly
illustrates that American shares, according to the Shiller P/E Ratio, have only been more expensive on
two occasions – Black Tuesday at the start of the Great Depression and the Tech Bubble of 2000.
Tech bubble
Courtesy: www.multpl.com
For any investment, the price is what you pay and value is what you get.
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The most commonly used ratio is called the Price-to-Earnings (P/E) ratio, which divides the price of a
share of a company by the annual earnings per share of that company. Normally, you want to buy a
healthy, growing company when its shares are trading at a low P/E ratio so that you receive plenty of
future earnings for the price you pay.
However, it is not that easy! Earnings fluctuate throughout good times and recessions. This plays havoc
with the P/E Ratio and can thus confuse or deceive even the most experienced investors. Robert Shiller,
a professor of economics at Yale and a Nobel laureate, popularized a specific version of the cyclicallyadjusted price-to-earnings (CAPE) ratio to help smooth these fluctuations out and to illustrate a more
consistent representation of the ratio between price and earnings.
In short, it gives you an average P/E ratio over a 10-year period and thus considers the various business
cycles over a decade. In a simple cricketing analogy, this would be like judging a top batsman on his
record over a 10-year period, rather than just one season.
If one studies the graph above, it is quite evident that American shares are historically expensive.
Furthermore, Allan Gray/Orbis note in their latest quarterly commentary that American companies are
making up the largest weightings in the global indexes seen over the past 30 years. We believe this is
unsustainable and that “this time is not different”. American shares are pricey - do not be fooled by the
compelling evidence that Wall Street and analysts present to you urging you to ignore the facts and
simply take a long-term outlook.
Whilst we are finding excellent value in emerging markets, particularly Chinese internet shares and in
Asia, global markets will always be held hostage by the American markets. If the American market
tumbles and reverts to the mean, you can be assured that other markets will follow, irrespective of the
value on offer. We thus remain cautiously optimistic on our preferred markets.
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Rounding Off
I would like to thank each and every client this past 6 months. It is not easy to see your positions go
against you. As the Rand strengthened our portfolios suffered – yet the response from our clients was
absolutely fantastic. You have bought into the concept of defending one’s wealth in international terms
– and that there are more opportunities if one invests globally as opposed to just South Africa.
President Zuma’s actions are not unique to South Africa. South Korea recently had a leadership crisis
and Brazil, Russia and Turkey have all suffered from crises in the past 3 years. This affirms our belief that
diversification should be the cornerstone of any investment portfolio. Our portfolios did very well
recently – this underscores the importance of not having all your investments in one country.
We are not sure what lies ahead, but we would again like to thank our clients for their patience.
Kind Regards
Mike Carruthers
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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