Daily Equity Report
Seed Weekly - Summary of 2015 Performance
The last month of 2015 and then into January 2016 proved to be exceptionally volatile for investments, both locally and globally. The big economic story was the rand weakness in December, which has perpetuated into January 2016. While the rand had been declining throughout 2015, it was sold down heavily in December and further into January. This followed the sudden and politically motivated replacement of the incumbent Finance Minister with an unknown, and then under duress reinstating Nene’s predecessor, Pravin Gordhan.
Over the month of December, the rand weakened by almost 7% to the dollar, bringing the total rand weakness to 35% for the 2015 year. During December all 3 rating agencies delivered downgrades on government debt ratings or to their outlook. Failing drastic action, the next step is possible derating to sub investment grade. Fitch and S&P have review dates in June 2016.
South African government bonds were sold down heavily as investors’ risk assessment of South African investments increased. This translated into an immediate negative impact on holders of SA bonds, property shares and financial shares.
The rising yield is a gauge of the actual and perceived risk that both local and foreign investors have of South African bonds. When other South African investment assets are discounted by the higher yield their price declines, which is exactly what happened to listed property and equities, especially financials.
The chart below is the yield demanded by investors in the R186 government bond. This is a benchmark bond, having the highest weight in the All Bond index.
Chart 1: Yield on the R186
December saw local equities decline by 1.7%, which brought the total return for listed JSE shares to just 5.1% for 2015. This was, therefore, down sharply from the positive 10.9% in 2014, 21.4% in 2013 and 26.7% in 2012, and paints a clear picture of the bull market in local shares coming to a close. In USD terms, local shares fell by 21.5%
Our models have been indicating that local shares have been expensive for some time now, and the lower returns were therefore not too much of a surprise. As always, sector and stock selection was very important, but in 2015 it was particularly the case. At a sector level, in making up the 5.1% return, resources declined a massive 37%, Industrial shares gained 15.3% and financials gained just 3.9%. Clearly, avoiding resources in 2015 was critical.
Secondly, within these sectors relatively few shares contributed to the positive performance of the total return. It has been estimated that excluding the performance of SABMiller, the index would have been negative and excluding the performance of 4 shares - SABMiller, Naspers, British American Tobacco and Steinhoff would have seen a return of approximately negative 7% on the JSE All Share index.
It is clear, therefore, that investors who held little or no exposure to these 4 shares struggled to match the return of the JSE All Share index.
Globally the big news item was the US Federal Reserve raising their core interest rates for the first time since June 2006. This was widely telegraphed to the market and therefore largely priced in. However on the day of the hike the S&P 500 rose by 1.5%, but subsequent action has been negative. The market is pricing in that the US Federal Funds rate will be just 1.75% by the end of 2018. In the light of zero to low inflation, falling commodity prices and excess capacity, the rise in interest rates is expected to be a slow process.
The MSCI All Country World Index ended down 1.8% for 2015. This followed the 5.5% gain in 2014 and the 23.4% gain in 2013. Emerging markets came under immense pressure in 2015 declining 14.6%.
Emerging market declines was partly attributable to the decline in commodity prices and partly due to the currency declines. Brent crude fell sharply in December – down 17% and into 2016 has continued to fall to new multi-year lows. For 2015 the price fell back 38%.
Other commodity prices continued their downward slide during 2015. Copper shed 26% and Platinum 28%. The price of gold in USD fell 10.5% for the year.
The analysis that we receive from research house BCA have been urging all investors to reduce expectations of both real and nominal returns on their investments. As an example for a global diversified portfolio, the nominal annual return from an investment from 1982 to 2015 was 9.7% in USD with average inflation over this period running at 2.7%.
Their expectation for the next 10 years is for that same diversified portfolio to return just 4.5% in USD with developed market inflation running at 2%. In this environment proper diversification, intelligent allocation of capital and a focus on costs becomes even more important than normal.
Ian de Lange
Tel +27 21 914 4966
Fax +27 21 914 4912
Tue, 26 Jan 2016- 11:07