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Certain assets have been knocked hard - experts

Sep 05 2016 16:59
Carin Smith

Cape Town - With the weaker rand and the prospect of a ratings downgrade, it is no surprise that local interest rate-sensitive assets have been knocked hard, Old Mutual multi-managers Dave Mohr and Izak Odendaal said in an investment note issued on Monday.

The 10-year SA government bond yield rose from 8.6% to 9% during the month of August, but was still well below 9.7% where it started the year.

The All Bond Index (Albi) lost 1.7% in August, cutting year-to-date returns to 11.7%. Over one year, the Albi delivered what Mohr and Odendaal call a disappointing 4.5%, lagging cash and inflation.

Listed property followed bonds sharply lower, with a loss of 4.8% in August. Year-to-date, the asset class has returned what they term a respectable 7.6%, but the twelve-month number has rolled down to 3.5%.

The JSE Financials Index lost 3.3% in August, wiping out most of the year-to-date gains. Over one year, the sector lost 4%. However, rand hedge industrials rallied in August and lifted the JSE All-share Index to positive territory for the month.

The rand

The rand volatility over the past year in particular is a reminder to Mohr and Odendaal of the importance of diversification. They explained that this is since markets seldom move in one direction and can be unpredictable over the shorter term. When the rand weakens, offshore investments and rand-hedge shares tend to benefit.

"Interest rate-sensitive assets such as bonds, listed property and bank shares do well when the rand strengthens. Nobody knows where exactly the exchange rate will be in the future, but the massive 16% annualised depreciation against the dollar over the past five years suggests that the worst is probably behind us," they said.

"A fearful concentrated portfolio of rand-hedges could therefore be a risk - we’ve seen how quickly the rand can rally when conditions were in its favour this year."

They added that it also remains true that over longer investment horizons, short-term volatility fades away.

"The key for investors remains to have an appropriately diversified portfolio built around long-term goals and the time available to meet those goals," they said.

At current levels, the rand is certainly weak enough to continue supporting export growth, they added.

They describe the rand’s response to renewed political uncertainty as having been severe, but the currency had a strong rally that was helped along by the positive reaction to the elections.

It has also been worsened by increased uncertainty over the timing and extent of US interest rate increases following comments from key Federal Reserve officials over the past two weeks, they explained.

"However, Friday’s payroll numbers indicating the US economy added 151 000 jobs - less than expected - complicates the case for a US rate hike later this year."

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