Plummeting rand impacts asset performance

Jan 12 2016 17:28
Carin Smith

Cape Town - The rand's more than 10% decline against the dollar during the fourth quarter of 2015 was clearly reflected in the relative performance of asset classes during the quarter, according to Herman van Papendorp (head of macro research and asset allocation) and Sanisha Packirisamy (economist) of Momentum.
The best performers were global assets, with global equities outperforming global bonds and cash, according to their quarterly market and economic review, released on Tuesday.  

Among the local asset classes, rand weakness also assured outperformance from the gold and platinum exchange-traded funds (ETFs), despite declining commodity prices during the quarter. Domestic cash outperformed equities and  Inflation Linked Bond (ILBs) during the quarter.

Within equities, non-mining rand hedge shares strongly outperformed, reflected in the outperformance of industrials (+6.6%) over financials (-3.3%) and resources (-19.2%).

READ: Rand meltdown brings recession, junk rating closer to SA

Local bonds and listed property were by far the worst performers during the fourth quarter, the review shows. This was due to rand weakness impacting negatively on inflation and interest rate expectations.

Van Papendorp and Packirisamy believe investors should maintain a full exposure to offshore assets in 2016, with the fundamentals and valuations of global equities looking far superior to those of global fixed income assets.

"Although there seems to be little to choose between developed market (DM) and emerging market (EM) equities on valuation grounds, we believe superior fundamentals for the former skew the risk-reward ratio meaningfully in favour of DM equities, particularly vis-à-vis commodity-exporting and current account-deficit EMs," they explained.

"Within the developed market equity space, the combination of positive macro-economic realities and preferable valuations support excess exposure to the European and Japanese equity markets, rather than to the US and UK."

READ: Rand's uncontrolled drop to cause further rate hikes - analysts

Among SA asset classes, they believe the SA equity market’s valuation premium relative to its own history and other emerging markets is justified by the higher quality of its earnings base, as well as the supremacy of its management teams and corporate governance.

"In contrast to the opening up of a valuation discount in the SA bond market that has increased the attractiveness of this asset class, the huge valuation premium attached to local listed property constrains its prospective returns, in our view," they said.

"On a risk-adjusted basis, returns from domestic cash look enticing to us in the near term."

Van Papendorp and Packirisamy said in their review that a confluence of factors caused the rand to fall steeply during the final quarter of 2015, including the first US rate hike in almost a decade, coupled with further easing measures in Europe and Japan, which propelled the dollar stronger in the quarter.

This had negative consequences for the currencies of commodity exporters with large current account deficits like South Africa.

"Furthermore, slowing domestic growth, culminating in negative credit ratings action by both Fitch and S&P in early-December, put additional pressure on the rand at the time," they said.

"But the rand’s inherent vulnerability was fully exposed when SA changed finance ministers twice in the space of five days in December, derailing previous views that SA’s monetary (SA Reserve Bank) and fiscal (Treasury) institutions were above political meddling."

The current state of the local and global economies makes a compelling case for the "old adage" of diversifying one’s investments, Eric Enslin, CEO of FNB Private Wealth and RMB Private Bank, said on Tuesday.

In the second half of 2015, economies around the world had to deal with challenges such as poor growth, currency volatility and inflation, amongst other factors. Emerging markets, in particular, were worst hit as a result of the flight of capital to more developed economies, the heavy reliance on commodity prices which have come under pressure and a depreciating currency.

"South Africa, forming part of this grouping, has its fair share of similar challenges, exacerbated by concerns around the long-term impact of the current drought. Reviews by ratings agencies and the increase in US interest rates also forecast a tough outlook for the country," said Enslin.
In light of all these factors, he said investors have to consider diversifying as part of their long-term investment strategy, and in the process, minimise the risk associated with the current economic adversities. Random diversification, however, could lead to uncertainty with regards to what the outcome will be. Diversification also needs to take place over asset class, sector, geography and currency, amongst others.

Enslin said it’s important to have a holistic investment approach, because every region or country offers a unique opportunity.

ALSO READ: Weak rand shows investor concerns - economist

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