With recent happenings in our markets around junk status and government reshuffling, we realise that you as a client may have concerns about the impact it will have on your funds. As such, we have put a few pointers together below on feedback from our own asset management team which, as part of the value offering of Stringfellow, is available to you.
The power in your corner
It’s at times like these that having an asset management team at your disposal counts. The recent acquisition of J&E Intermediaries to form Stringfellow Advisory Services, couldn’t have happened at a more appropriate time. I believe we will be adding more value with our combined resources to ensure stability and growth.
As a company, we follow a philosophy of being disciplined, long-term focused and diversified, while actively managing investments. As such, the weakening of the Rand is something that we wish to take advantage of.
Political events that affect the markets
Another factor will be the extreme local bond weakness and the effect on the financial and property sector. We also need to consider the recent political events and the impact they have and have had, such as:
- Nene-Gate in Dec 2015
- BREXIT of June 2016
- The US elections of November 2016
Panic during any of those events could have destroyed capital on a permanent basis. We have decided to desist from making any major changes to our strategy, which has included a high conviction in Emerging Markets, India, and being neutral on gold. We already had a low conviction on local listed property and local equity. The weakening Rand has always been a good buffer for our domestic portfolio.
How we manage money
Equity (shares) will always be needed in a portfolio that needs capital growth. For above-inflation returns, we could not hold only cash or bonds, as in the long term, the returns would not outperform the benchmarks we set or meet your expectations as a client.
We need to point out the following when it comes to local equity within the portfolios we manage:
- Nearly 60% of the local equity market earnings is comprised of offshore earnings and thus tends to benefit well from periods of Rand weakness.
- Nearly 40% of the local listed property market earnings is comprised of offshore earnings and thus tends to benefit well from periods of Rand weakness.
- Most of our strategies have retained the near maximum 30% offshore allocation, including Africa, and this will again benefit from periods of Rand weakness.
Not having a hand in the equity space may have an adverse effect on your portfolio over the long run. You would have seen the Rand weaken on the news of the cabinet reshuffle and junk status being implemented. You would have also seen the Rand strengthen again back to below R13 to the Dollar. I wish to remind you of a comparable situation in Brazil. Their president was also seen in a negative light, they too went to junk status and their currency fell. When the President was impeached their currency climbed again. With our current situation, many foreign investors don’t want to lose out as they did in Brazil.
Another factor that one must consider is that Emerging Markets have outperformed Developed Markets, by far. For this reason, we still see opportunity there, as do foreign investors. Comparing our local markets to other Emerging Markets, we still have value and do not have as much negativity as others may have.
We endeavour to protect our clients against Junk Status
This is not so say that having junk status won’t have a negative effect; it will, as some investors such as J P Morgan, are already earmarking withdrawing funds from our Bonds markets, as their mandates require this when we achieve below investment grade rating. We believe there will be a gradual erosion of some capital from our shores, but how much, and what effect, is difficult to gauge.
We are waiting patiently for extreme market reactions that can provide healthy risk-adjusted valuation opportunities for us, such as:
- Taking offshore profits
- Once the Rand normalises, we will deploy ZAR fixed-income back into US Dollar cash.
- Should bonds sell off aggressively, we will increase our allocation, but not by more than 10%.
Considering our already raised liquidity buffer, we recommend not making any panicked decisions given heightened levels of political uncertainty and how this has historically resulted in unnecessary loss of capital. Our confidence stems from our deep-seated belief that our strategies are sufficiently diversified to enable us to ride through the highly-localised risk.
We overlay these comments onto some signs of improving fundamentals in South Africa, such as:
- Prospects of improving GDP growth due to a strong anticipated recovery in the Agriculture Sector, as the drought season eases, with output expected to rise by over 87% compared to last year.
- Prospects of improving GDP growth due to an improved Mining Sector, on the back of rising commodity prices, supported by a synchronised upturn in global economic growth.
- Prospects of improving GDP growth, due to an improving Manufacturing Sector, as global PMI numbers, all stage a synchronised recovery.
- Rapidly improving current account deficit.
- Generally constructive backdrop for emerging economies.
On this basis, our response to rising political uncertainty remains the same. We remain calm, and place a lot of trust in our highly diversified investment strategies, balancing out short-term performance outcomes in the face of these shocks, considering the lack of transparency around how the current policy framework will be altered, and whether this will have a positive or negative change in the SA economy.
We, however, remain highly diligent in monitoring the risk vs. return backdrop across the various investment opportunities that we monitor, to ensure we keep risks well controlled, while at the same time responding constructively to attractive valuation gaps that may emerge.
Let Stringfellow provide you with certainty
Diversification is indeed the only “free lunch in investments”. Continuous due diligence, however, remains important but as a Stringfellow client, you can rest assured that we are mandated to provide stability during uncertain times. If you’re not yet a client, but you are considering using our services, simply contact us and you will soon be in contact to give you sound advice and peace of mind regardless of any shifts in the market.