Boom & Gloom: September 2015

Boom & Gloom

Boom & Gloom: September 2015

Our view of the investment markets

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

Table 1

Growth in US corporate profits tends to follow US GDP growth over the long term. Corporate profit growth averaged just below 2% over the past two years, spiking somewhat over the past two quarters. Financial conditions in the USA peaked mid-2014 and have moderated over the past year. This is supported by the US leading indicator pointing to slightly softer growth in the US. The softening in US growth will flow through to US corporate profits (which are at an all-time high). Analysts have been lowering earnings expectations (see BEst EPS in graph below) over the past year but all-time low interest rates are supporting the index rating.

Lately, currencies (especially the US dollar) have been the most notable driver of the asset markets. Dollar pricing is driven by the availability of the US dollar, or the expectation thereof. The demise of quantitative easing (QE) froze the expansion of the dollar pool and expectations of tighter US monetary policy created the expectation that the pool will start to shrink, placing pressure on the price of dollars. The strong dollar will keep pressure on emerging market (EM) currencies until the US monetary policy has normalised. Adding to EM despair, the strong dollar and a slower growth in the manufacturing sector (especially in China) is driving commodity prices down.  Weaker EM currencies would generally normalise local currency commodity prices for exporting countries, but cheap and easy offshore funding has tempted EM countries to shift funding from local to offshore. This is starting to place additional strain on currencies. The saving grace in the current market is the asynchronous monetary policies being applied worldwide. The European and Japanese stimulus being pumped into the markets is helping to pick up some of the slack caused by the shrinking dollar pool.

In both the Eurozone and the US the financial conditions indicator is somewhat softer – this was mainly driven by higher asset volatility and softer equity markets.  The Eurozone leading indicator is improving and supporting stronger GDP growth.  The stronger Eurozone growth expectations have been supporting analyst earnings expectations, which have been fairly flat over the past year.  The growing historical earnings are proof of the improving economic environment in Europe.

The Asian picture, driven by China, does not look great.  The financial conditions indicator is very negative and the leading indicator is flat.  The transition of the Chinese economy to a more services-focused economy will cause volatility as the authorities navigate the process – a process in which they are bound to make errors.  We would prefer to be invested in services industries or consumer staples.


Global equity markets were weak across the board.  The Volkswagen scandal leaned on the European stock market as uncertainty concerning the environmental impact of diesel engines placed pressure on the platinum price.  South African equities were flat but with huge performance dispersion.

Total return to 30/9/2015

graphe 2


Consumer goods had a strong month; driven by the AB InBev bid for SABMiller which pushed the stock up by 27%.  The sector also had support from Steinhoff, BTI and Richemont.  Resources were hammered, mainly because of platinum miners on the back of the Volkswagen ordeal.  Base metals had a weak month due to weak Chinese demand and oversupply.

Total return to 30/9/2015

graph 3


graph 4


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Eugene Goosen

Eugene Goosen



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