Boom & Gloom: April 2016

Boom & Gloom

Boom & Gloom: April 2016

Our View of the Investment Markets

This table reflects our view of the relevant assets, based on expected performance.

Relevant Assets

Asset Class Overview

Equity

South African equities, on an index level, trade at high multiples. From a quality prospective, return on equity (ROE) and earnings before interest, taxes, depreciation and amortization (EBITDA) margins are below the long term average, so there is potential for it to revert to average. Operating profits are above the long term average, making margin expansion less probable.

Our view is that the US interest rate hike will follow a placid path. China is stabilising, commodity prices are bottoming out and emerging market assets are generally attractively priced – which allows for a “hold” view on South African equities on an absolute basis. However we see more value on a relative basis in other equity markets, reflected in our underweight view.

Bonds

South African bonds are being driven by three factors: US long bond rate expectations; emerging market risk (Risk on/off) and domestic risk, especially political risk.

We use the JP Morgan Emerging Market Currency Index as a proxy for the Risk on/off trade as well as the JP Morgan EMBI plus sovereign spread as a relative pricing indicator to US treasuries. We see a reasonable probability of some relief in emerging market currencies, resulting in some strength with a bit more stability over the medium term.

The weaker US dollar, as measured by the US Trade Weighted Dollar Index, brought some relief in the US interest rate markets. The US long bonds rallied to near record lows, due to a lack of inflation expectations. We do not foresee a dramatic increase in US growth and inflation over the next year, and expect the US 10 year bond to sell off to around 2.36% over the next year.

Domestic politics will strengthen in the run up to the local municipal elections, which will cause a negative bias on domestic bonds over the short term.

The South African domestic 10 year bond is trading close to Russia and Turkey (which each have their own challenges) but higher than India and Indonesia which have similar credit ratings.

Global Peer Universe

Our South African 10 year bond macro model, prices the one year forward fair yield at 9.5% while the US 10 year implied model expects a 9.51% yield. The domestic bonds could rally a bit more if we see further rand strengthening, which will drive inflation expectations down. Our current one year South African inflation view is 6.4% increase over the next 12 months. If the rand’s strength maintains its momentum and settles around R13.50 – 14 to the US dollar, CPI could be 0.5% lower which will translate to a 9% fair value for the R186.

Cash

The current real short term interest rate is +1.1% (3 month Jibar is 7.3% and CPI is 6.2%). The South African Reserve Bank will manage the real short term interest rate over the long term around +3%. Given the weak growth fundamentals, one will expect the SARB to aim way below the long term average, but the risk of elevated inflation justifies the current level. We see the short end of the yield curve (around one year) as attractive, relative to other domestic asset classes.

Property

We use the SARB composite business cycle indicator, SA Government Bond Index and inflation to model a macro view of the FTSE/JSE Property Index. One year return expectations is 4.4%, the market is currently 3% over-valued resulting in an underweight allocation.

Property Index

Global equity markets

The table below illustrates the major regional equity indices valuation, ROE’s and margins. We favour Asian emerging markets and Europe from a growth, quality and valuation perspective.

Global equity markets

AC – All Country; EU – Europe; EM – Emerging Markets; ME – Middle East

MARKET PERFORMANCE

Total return to 30/4/2016, in domestic currency

Market Performance

 

SECTOR PERFORMANCE

Total return to 30/4/2016

Sector Performance

COMMODITY PERFORMANCE

Commodity Performance

 

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Eugene Goosen

Eugene Goosen

 

Disclaimer

The information in this document is proprietary to Ora Fund Managers (Pty) Ltd (Ora) and is not to be reproduced, distributed, published or used for any purpose other than the evaluation of any proposal contained in the document, except with the written permission of a representative of Ora. The information contained in this document (together with any opinions expressed or further information provided in connection with this document) is of a general nature and provided for illustrative purposes. It does not address the circumstances of any particular person or entity and it is not a recommendation or advice in relation to any transaction or investment. In making this information available, we are not purporting to act in any way as an advisor or in a fiduciary capacity. No one should rely on any of this information without appropriate advice from an independent financial adviser, based on a thorough investigation of the investor’s specific circumstances. While we have taken care to ensure that the information is accurate and not misleading, Ora makes no representations or warranties of any kind with respect to its accuracy, completeness or correctness. The information is provided on the clear understanding that Ora will not be held liable or responsible for any loss or damages that may be suffered by any person or entity as a result of that party placing reliance on or failing to act on any of the information provided.

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