Since the finance minister debacle in December last year, the local economic environment has been especially volatile. However, it’s not all doom and gloom. In fact, the volatility has created worthwhile investment opportunities, especially in the banking and consumer sectors.
Risk does not refer to volatility – it refers to the risk of capital loss
This approach to risk is core to our belief in creating favourable long-term returns for our investors. There is no doubt that we’ve experienced an enormous amount of volatility lately. After the “Nenegate” event in December last year, the FTSE/JSE All Share Index (ALSI) fell by 6.6%, reaching a low on 21 January. The ALSI, however, rebounded by 14.7% by 22 March off its lows and is now up by 4.7% for the year to date (as shown in Figure 1).
Despite recovery in the rand since December, the currency remains at a historically weak level
After the finance minister debacle in December, the rand weakened from R14.88/$ to a whopping R16.84/$, which amounts to a depreciation of 13.2%. It has since recovered to R15.30/$. However, we forget that it was only a little more than a year ago when it was R11.55/$ (1 January 2015), as shown in Figure 2.
The market has adequately priced in all the bad news
The South African economy has been plagued by an enormous amount of negative news and sentiment since Finance Minister Nhlanhla Nene was fired on 9 December. These include fears of investment grade downgrades, lower GDP growth, higher inflation, higher interest rates, an extremely weak rand, and politically driven power plays between current Finance Minister Pravin Gordhan, the Hawks and SARS. This news, however, is widely publicised in the media every day. As a result, it is mostly priced into the market – it is not new news. If we experience a downgrade in our sovereign debt status, there will definitely be further volatility. However, as we’ve witnessed in the past, this actually creates investment opportunities.
The recent volatility created worthwhile investment opportunities in the banking and consumer sectors
The FTSE/JSE Banks Index fell by 28.5% between 1 November and 11 December last year. With dividend yields approaching 8%, this created a fantastic opportunity to add to some of our existing bank positions. In addition, the sell-off in some of the consumer stocks such as Imperial, Shoprite, Mr Price and Foschini offered great opportunities to buy at extremely attractive prices.
It has been a good first quarter for our clients, largely because of the recovery in commodities
We have witnessed a strong recovery in commodity-related stocks that were significantly oversold towards the end of last year. This is due to a recovery in the underlying commodity prices, as shown in Figures 3 and 4. The Brent Crude price bottomed on 21 January at almost $29 per barrel, only to recover to its current levels of $41.79. The platinum price has recovered off its lows of $830 per ounce to $996 per ounce. The copper price reached a low of $4,376 per ton, only to recover to its current levels of $5,070 per ton, while the iron ore price similarly recovered to $58 per ton after reaching a low in December 2015.
The recovery in the commodity prices off their lows has resulted in significant moves in the underlying shares. Anglo Platinum’s share price has doubled year to date (up 104%), Anglo American is up 76%, and Northam is up 67%, to mention a few.
In addition, some of our other industrial holdings have performed well. We added Barloworld (up 33% year to date) to the unconstrained portfolio. Steinhoff, our largest holding, is up 20% for the year. Hudaco has recovered and is up 19%.
A re-focus on value will benefit our portfolios and our clients
We are witnessing a change in sentiment back towards value. It is evident that the market’s focus on value has become more acute, which favours our overall positioning on behalf of our clients. After all, long-term returns are based on the price you pay for a share.
By Claude van Cuyck