Market Analysis - November 2017

18/12/2017

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The obvious elephant in the room, at the time of writing, is the ANC elective conference. Also, in an unwelcome intrusion into the generally unsettled socio-economic environment, there is the large matter of Steinhoff. Although this review concerns November, we can happily say that Emperor funds had zero long exposure to Steinhoff, and investors in Sir John Ross have very profitably benefited from our short position in the company. I will go into a bit more detail when I discuss that fund’s performance later.

On the political front, it seems investors have become almost anaesthetised to bad news and the prospect of bad news. Much of the rotten information is priced in or discounted, so we as battle-hardened South Africans will have to deal with December’s political fallout as we usually do: vasbyt and find value where we can.

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It was no surprise in November, given the politics, that bonds fell 1% in the month. However, there were gains elsewhere. The property sector rose 1.1%, the JSE’s All Share Index was up 1.3%, and the rand was 3.4% stronger. Our currency, contrary to expectations, is now flat for the year.

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The international picture in November looked pretty good, excluding Europe. In the US, the Dow was up 3.8%, the S&P 500 was up 2.8% and the Nasdaq was up 2.1%. In aggregate, the US share market is up more than 20% in 2017. There was a similarly pleasant picture in Hong Kong (Hang Seng up 3.3%for the month and 32% year-to-date), Japan (Nikkei up 3.2% for the month and 18% year-to-date), and Emerging Markets were up 3% in November and 33% in 2017. On the downside, the giant FTSE in the UK fell 2% and Germany’s DAX was down 1.5% in November.

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On the JSE, the hottest sector continued to be Consumer Services, up 6.8%. Second was Financials at 4.2% and Industrials at 3.6%. Mid-caps rose nicely at 2.2% but small-caps continued to struggle, ending down 3.26%.

Dragging the local market lower was Consumer Goods (-6.7%), represented by heavyweights BATS (-3.7%), AB-Inbev (-8.7%), Richemont (-10.2%). Also disappointing was Basic Materials, with the big boys Glencore, Billiton and Anglo American taking a knock. But perhaps the biggest shock came from Technology, with EOH tumbling 20% and AdaptIT falling 12%. This dragged the tech sector down 12% overall. The drop in EOH was caused by margins calls which automatically triggered against leveraged director holdings.

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The standout shares on the JSE in November were Mr Price (+18.7%) and Shoprite (+12.6%). Leading the pack downwards were property company Intu (-11.5%) and Richemont (-10.2% on the back of disappointing results, but all things considered the share is up 50% since September 2016).

Perhaps the biggest surprise was Steinhoff -- down 8.4% in November, long before the news of its internal nonsense came to light. Our internal models had flagged the share’s lagging performance midway through 2016, and we commenced a very profitable short position in the Emperor hedge fund since November 2016.

Did we know the price will drop to from R60 to R5? No way! We do however flag companies if there are allegations of malpractice or events that effects the management team, etc. In the case of Steinhoff, it was corporate governance, bad tax and accounting practises. The tax investigation for Steinhoff has been in the public domain for some time. This also reflected in the share price and ultimately effects the momentum and therefore we went short on this share. It always astonishes me to see that share prices normally decline (or moves sideways) before the actual bad news gets released “publicly”.

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ROBERT FALCON SCOTT

Up 2%, the fund’s best performers were Shoprite (+12.6%), Dis-Chem (+11.8%), Bidvest (+11.6%) and Mr Price (+18.7%). Lagging the pack for the month were the commodities players Glencore and Northam -- they’re up for the year, though, and we’re happy to keep them for now.

SIR EDMUND HILLARY

The fund rose 1.9% on the back of a strong Naspers, Barloworld, PSG, Shoprite and Dis-Chem. Eating into performance were Richemont, Glencore, Mondi and Afrimat.

SIR JOHN ROSS

The hedge fund (up 4.4%) benefited from the same long exposure to shares held by Sir Edmund Hillary (with additional exposure to Mr Price and Naspers) and similar downside to commodities players like Anglo and Glencore, but the major kick to the fund’s value came from short positions in Lonmin (which fell 38.5% in November) and Steinhoff. The latter, as we all know, has collapsed -- but it has had a good downwards run and we are happy to close the short position and take risk off the table after a >70% decline.

UNIT TRUST-- EMPEROR MOMENTUM EQUITY

The JSE-focused fund was nicely up 3.1% and the foreign fund was down 2.6% (mainly on the strength of the rand). Domestically, we benefited from a good showing by Kumba (+19.6%), Mr Price, Astral Foods (up 13%), and again by Naspers. After the Naspers recent 15% dip, we are considering upping our weighting in that outstanding rand-hedge share. We must highlight here one of the most fascinating shares on the JSE -- Kumba. If you want to see a cyclical wild ride, look no further than the iron ore play. If you’d bought the share at the end of 2015, today you’d be looking at a tenfold return -- the price is up a ridiculous 1300% over that period and closing in on its 2012 levels.

EASY EQUITIES BUNDLES

Bonds, despite their reputation as being “safer” investments, can be extremely volatile, and the Elbrus fund reflected this fact. It was down 2% in November. Moving up the risk (Equity) scale, however, the returns were better. The difference in our bundles lies in their weighting towards certain asset classes. Over the longer term, our more aggressive bundles have delivered far better returns based on their exposure to selected index trackers and targeted local shares.

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Technical Review

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Putting aside the correction in the JSE in early December, November showed a push above the support level that has been keeping the index buoyant over the past three months or so. We might see a further 5% or so drop towards the 50 000 mark in the short term, but it all depends on sentiment. We see no immediate need to increase exposure to the market, given political considerations, and the fact that our MSX-Monthly momentum indicator is still relatively low in the 56 region. (This simply means that barely half of the JSE’s shares are in an upwards trend. It is a worrying sign that the market does not show much confidence.) According to Emperor’s Rule of 18, stock valuations have become slightly more attractive but are still too pricey to pile in with any confidence.

Happy investing.

TC van der Walt

Fund Manager

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