| By the time most South Africans returned to work on 11 January, the world markets had their worst start to a new year ever, with many of the major global indices dropping back to levels seen during the September 2015 sell-off.
Looking back
Concerns about an economic slowdown in China, as well as low oil prices (oil reached $30,7 on 11 January 2016), indicated a generally weaker economic outlook for most countries and spooked investors.
Locally, the South African rand had taken another tumble, falling nearly 10% in the first 10 days of the new year. As both a commodity-producing country and an emerging market South Africa was already facing headwinds, which were only fueled by poor political decisions around the Finance Minister. At R16,86 to 1USD, you received 35% more rands per dollar than a year ago.
By 11 January 2016, the MSCI World Index was down 14% from its May 2015 high and the S&P 500 was down around 10% from its high. The only upside for South African investors was that the weak rand has meant that in rand terms, the MSCI World Index is actually at a record high – up 34,1% since the end of 2014.
Locally, the JSE appeared to be holding ground in line with global indices, with ALSI 40 Index starting the year only 12% down from its record high in November. However, a deeper look into the underlying indices suggested a bleaker picture for specific sectors of the JSE.
The much broader mid-cap index was down 22% from its April record high and the small cap index down 18,5%, reaching levels last seen in November 2013. The Financial Index was down 21% from its April high with banks the worst hit down 37%.
These sectors indicate the damage done to the broader market over the past month or so because they are largely SA Inc shares with no or very little rand hedge status. This has created areas of value in the market.
Although the overall price-to-earnings ratio (PE) of the JSE is currently 17 times earnings, the dividend yields are suggesting that there’s still value in our markets. On 11 January, the dividend yield of the JSE Top 40 was 3,3%, the highest in seven years, while mid-caps offered an average dividend yield of 3,2% and small caps offering 4,2% dividend yields.
Companies such as Standard Bank and Imperial saw such a drop in share price over the last year that they were trading at PE ratios of closer to six times and at a 6,2% dividend yield. Investors in Standard Bank would be receiving a better income return than those with a Standard Bank money market account.
Going forward
Although the markets locally and globally have experienced a routing, it would be too early to call this a bear market where we would need to see at least a 20% fall in the main indices. Locally there could be some buying opportunities, as long as the politics don’t worsen over the municipal elections. The rand is expected to remain under pressure and this will favour rand-hedge stocks, although this appears to have already been factored into the prices.
Globally, we prefer Europe over the USA. Goldman Sachs expects the European market to gain 18% over the next year and the S&P 500 to gain about 9%.
Europe is still in the early stages of its economic recovery so we expect earnings to grow faster in that region. At the same time, the stronger USD, which has gained against all major currencies, will hamper USA export markets and lower growth expectations. The weaker euro on the other hand will benefit European exporters.
Although the Japanese market opened the year 9% weaker, we see opportunity for higher returns in Japan due to a switch by pension funds from bonds to equities, as well as improved corporate governance.
The UK’s FTSE remains an anomaly as 75% of its top-listed companies are actually foreign companies with operations outside the UK and is not necessarily geared towards the UK economy. Many of these companies are in the mining and oil sectors so their returns will be dependent upon a general recovery in commodities and oil.
Despite massive losses on the Chinese stock market there is an opportunity for recovery. The Chinese economy is restructuring away from manufacturing to a service economy. In fact, over 50% of China’s GDP is generated from the service sector and this is growing at around 8,5%.
As part of the restructuring, the Chinese government is looking to remove the pegged rate between the yuan and US dollar, and has also devalued the yuan. While investors have feared this indicates a weaker economy, a weaker currency will make Chinese exports more attractive.
Our investment strategy for 2016 remains a focus on offshore-developed market opportunities, but with carefully selected equities. We still believe that the global economy will continue to grow, albeit slowly, and that equities will provide a better long-term return than bonds or cash. |
