Are Despite a year of volatility and surprises, our portfolios had a very good run in 2016. We will continue to focus on bottom-up stock picking to manage the impact of macro events.
Read the transcript for the video below
South African markets
The markets in review
The fourth quarter of 2016 was another disappointing quarter for South African equities. It concluded a disappointing year, with equities delivering only 2.5%, which is below inflation and below cash returns. In fact, it is the second year in a row of equity underperformance. One of the factors that really weighed heavily on the equity markets this past year was the strong rand, which impacted some of the dual-listed stocks like British American Tobacco, Richemont and SABMiller (until they de-listed). If we have a look at which area of the market did exceptionally well in 2016, it was resources. As a fund manager, if you were not invested in resources, it was quite a tough period. If we look more specifically at the fourth quarter there was a reasonable amount of good news, with South Africa managing to avoid a downgrade by Standard & Poor’s. Despite that, there was still a lot of volatility. The US election really set the cat amongst the pigeons and on balance was negative for emerging markets, including South Africa.
Our portfolios had another good quarter, ending what was a very good year. Our focus on identifying mispriced opportunities as well as adopting a fairly defensive or conservative approach in the way in which we construct our portfolios meant that the funds were able to withstand some of the surprises that were thrown at us during the year. If we look at the areas that made positive contributions during the quarter, this was largely due to good stock picking. Examples include Barloworld, Hudaco, Investec and in particular Altron, which we have identified in the past as being a significantly mispriced opportunity. We have started seeing the rewards of these opportunities and we think that there is a still a lot more to come.
We’ve now had two years where equities have underperformed cash. The last time we have seen this was probably in the mid-1990s. In fact, there has only been three periods since the 1960s where equities have underperformed cash for two consecutive years. The interesting thing is that in the period following the two years in which cash beat equities, we tend to see very good returns from the equity market relative to cash, with equities outperforming cash by 18% on average. That is double the average outperformance of equities versus cash. To add to this, the valuations we see today are the best we have seen in three years. The 12-month forward price to earnings ratio is at 13x, compared to 16x this time last year. This bodes well for expectations for equity returns. Having said that, there are a lot of macro events that could potentially weigh on these improving fundamentals. Our approach is always to focus on bottom-up stock picking. We still see a number of very attractive opportunities, particular in the mid and small caps space, and we will focus largely on South African-domiciled businesses.