As we have begun the second quarter of 2015, the outlook across Global Markets remains uncertain.
Although we have seen a significant recovery in local equities since 2009, over the past 24 months equity managers have become increasingly concerned about the overall valuation level of the market and many portfolios have been more defensively positioned. Despite global liquidity and investor exuberance driving domestic equities higher, over the past 6 months the market has struggled to gain further upside traction; we have seen sideways moves with increased volatility.
Many fund managers have advised that they seem to find more high-quality businesses offshore at more attractive prices than locally. This is evident in that many managers continue to hold their maximum Offshore allowance. However, it is important to remember that there are always pockets of value and a long-term agreed strategic weighting between local and offshore assets is likely to benefit your portfolio over time. Both currency movements and hard currency returns affect the overall performance in Rands.
European policymakers would have you believe that the euro zone is at a turning point; emphasizing faster-than-expected growth in the fourth quarter of 2014. The European Commission is forecasting growth in 2015 of 1.3%, which would be the euro area’s best outcome since 2010. However, France and Italy, the zone’s second- and third-largest economies, stagnated in the final quarter of the year. Greece’s return to the headlines has the potential to unsettle markets and fears grow that the area may fall into deflation. The ECB has adopted measures to boost prices and growth—most notably by agreeing to a controversial programme of quantitative easing, with the most recent figure at 93 billion euros.
Over the past year, South African bonds have benefited from slower-than-expected local economic growth, falling inflation expectations, a switch away from Russian sovereign debt into safer emerging markets, and a general reduction in global yields as growth remains uncertain. Although we are at the bottom of the interest rate cycle in South Africa, substantial interest rate hikes, that would drive the prices of long-dated bonds lower, seem unlikely in the short term. The local economy can ill afford higher interest rates, and any hikes in sympathy with the US Federal Reserve are likely to be short lived. In fact, with the already strong dollar, weak global growth, and signs of disappointing US numbers, US rate hikes are likely to be minor.
In the 2015 budget, Treasury has again revised its growth forecast for this year downward and expects the economy to expand by 2%. The best prospects for growth in the short term lies in less-energy intensive sectors such as tourism, agriculture, light manufacturing and housing construction.
South African inflation as measured by the CPI peaked at 6.6% in June 2014; it dropped to 4.4% last month and was, at the time of the budget, expected to average 4.3% in 2015. It is possible this may be higher given the rise in fuel prices over the past month.
Although SA’s fiscal position is constrained, there are three major strengths on which the country’s growth strategy can be built: Low interest rates; trade competitiveness enhanced by the weaker exchange rate; well capitalised banks and other financial institutions and strong legal and tax frameworks.
For some time we have warned that it seems that more realistic returns can be expected from investments in the near future, making diversification and asset allocation key in our investment decisions. This has proven to be the case over the past 6 months and is likely to continue into the future. In our construction of your portfolios, we retain a long-term outlook and make use of a diverse range of asset classes to reduce the volatility in attaining your objectives.
