Market Analysis - March 2017

07/04/2017

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At times like these, South Africans show their mettle. Or, if you’re an investor, their metal. Observers of our portfolios will have noticed that over the past six months we have steadily increased the weighting in the resources sector, which includes precious metals (Northam, Sibanye) and all the industrial raw materials produced by the likes of Kumba, Assore, Merafe, South 32, and of course the heavyweights Anglo American and Glencore Xstrata.

Given what we have seen in the political landscape, these shares have served us exceptionally well. Nobody can forecast the future but you can sense which way the wind is blowing. The rand depreciated during March and has lost all its gains for the year. Although short-term spikes influence returns, it should not deter us from our long-term investment strategy.


It is important to note that our portfolios are built through an extensive process of analysis of both value and momentum indicators -- not through trying to predict the value of the rand, the weakness of which has of course helped Resource shares immensely in the short term. But over the long term few holdings have a direct correlation to the rand, and we have tailored our portfolios without having to fret about currency volatility.

In the communication I sent to investors on March 30, shortly after Pravin Gordhan had been recalled from his investment roadshow in the UK and US, I pointed out that our portfolios are relatively well positioned given the turmoil in the markets. We all know things have got worse since then, but we are still confident that we have a firm hand on our holdings, overweight in positively-trending sectors, and are comfortable with our strategy. This is not a time to panic. In fact, we see this as an opportunity to take advantage of the unsettled business environment.

Drilling down into the performance of the market during March, the JSE Top 40 ended the month 2.35% up. The index has gained 2.88% since the beginning of the year.

The best performing shares within the Top40 index were Gold Fields (16.2%), Sappi (11.4%) and Richemont (11%). The worst performing shares were Netcare (-19.5%), Barclays Africa (-8.2%) and Steinhoff (-8.1%).

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The best sectors were Resources, Consumer Goods (mostly positive due to the increase of Richemont), and Consumer Services -- which benefited from the increase in Naspers, which earns most of its revenue offshore.

The worst performing sectors were Healthcare, Financials and Technology.

Indices March 2017.png

Beyond the JSE, our portfolios have benefited strongly from exposure to the exchange-traded DB X-tracker fund that mirrors the performance of the MSCI index in the US. Translated to rands, it has done exceptionally well. So too has foreign property, via such holdings as the Investec Australia Property Fund. Most major international markets ended positive in March, with the biggest movers being eurostoxx 50 and the Dax, up around 5%.

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In our segregated portfolios, hedge fund, and unit trust portfolios, Robert Falcon Scott was the best performing fund for the month, ending up 1.4%. Sir Edmund Hillary and Sir John Ross ended down 0.5% and 1.1%, respectively.

Obviously, after the bloodbath that followed the Cabinet reshuffle, shares sensitive to interest rates suffered badly. We are all aware by now of the effect that the credit downgrade by ratings agency Standard & Poor’s has had on the South African economy. Fortunately, we are exposed to the banking sector only via Capitec. And happily, for investors in the Emperor hedge funds or the Sir John Ross strategy which allow short positions, our short holdings have been mainly in financials (see below).

SJR strategy - long and short positions.png On the retail front, our holdings in Mr Price and Truworths have been hit hard. Price pressure on imported goods, never mind the higher risk of impaired consumer credit, will not abate in the short term. However, it is worth mentioning that we have invested in these shares because of solid research, and we have to remember this is a short-term reaction to adverse political circumstances. In the case of Truworths, for example, we view it as a solid value stock on the strength of its momentum indicators and its history of dividend payments.

Moving on to our bundles, most ended the month positive with the exception of the conservative Elbrus and Kilimanjaro funds. Bond and fixed-income ETFs such as the Newfunds Govi and Newfunds Ilbi were hammered last week when yields increased (causing the price of bonds to drop). However, the aggressive Everest bundle rose thanks to exposure to foreign exchange-traded funds and local resources-tracking ETFs. The Everest fund is up 2.9% in 2017.

Despite the horrible political outlook, Emperor’s market confidence has improved significantly and we have already started increasing gearing in all our funds. As things stand we will continue to raise gearing over the coming weeks.

In the sideways market of 2015/2016 we perhaps allowed portfolios to drift and returns were disappointing. Right now, however, we have total conviction and are fully prepared for whatever the markets throw at us. The investment environment has required a change of attitude: if we stand together and deal with it. It remains our duty as South Africans to make the country a better place for each and every one.

All the best and thank you for your continued support.

 

 

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