Your investments and the current political situation

30/03/2017

Correction image.jpgOn Monday morning, South Africans started the week with shock and disbelief as President Jacob Zuma gave an urgent instruction to Finance Minister Pravin Gordhan and his deputy, Mcebisi Jonas, to return from an investor roadshow in the UK and US.The presidency must not enjoy improving investor confidence in South Africa. The worst of all is that no one in the ANC seems to have any idea as to why the Finance Minister was abruptly recalled. We can all speculate that Gordhan will most probably be fired and a wide-ranging cabinet reshuffle is on the cards to dismiss Zuma detractors.

Gordhan’s dismissal may be delayed due to ceremonies in honour of Ahmed Kathrada, the anti-apartheid activist jailed with former South African President Nelson Mandela, who died Tuesday at the age of 87. Mr Kathrada has been critical of the current administration, asking President Zuma to resign following a damning court judgement against the president. It has been reported that Mr Zuma would not attend either the funeral or a memorial service "in compliance with the wishes of the family," a government statement added.

The world’s cynical view of president Zuma’s actions has impacted greatly on the economic prosperity of South Africans. The biggest impact will be on the depreciation of the Rand to around R14 (or lower) leading to higher inflation (Higher import cost, higher fuel cost etc). The other issue is a rating downgrade to junk status.

Let’s place this into perspective and see how our funds might react.

When performing correlation analysis between current holdings and the Rand/Dollar exchange rate by incorporating different periods (fixed and floating) the outcome was quite surprising. Not one share displayed a conclusive correlation with the exchange rate over the medium to long term (with exception to US equity tracker, DBXUS).

Assuming a medium-term view (6 - 12 months) and given we are of the view the Rand will depreciate (Gordhan gets fired) - there is no evidence to suggest that any of our current holdings will underperform or outperform based solely on Rand depreciation.

Our conclusion is that we are positioned appropriately for the circumstances and importantly not let the Rand depreciation push our investment philosophy off course.

Assuming a short-term view (a few days to a few weeks) and given we are of the view the Rand will depreciate -  our expectation of the markets is as follows: 

  1.  Resource shares (particularly gold) should appreciate;
  2. Foreign property and Rand hedge ETFs should appreciate;
  3. Naspers should not be affected by Rand volatility as much as you might expect, but could still appreciate;
  4. Consumer shares should depreciate: cyclicals like Woolworths and Truworths should depreciate much more than non-cyclicals like Bidvest and Tiger BRands; and 
  5. Financial shares (mostly local) could see a major correction (anything between 10% to 20% down as an estimate) - with bank being hardest hit.

Our holdings have been classified below  as green, orange and red, based on the above analysis and the political outcome of saying goodbye to our beloved Finance Minister, Pravin Gordhan.

  • Green: shares that should do well in the short term (appreciate);
  • Orange: mixed outcome but shouldn’t be too volatile (neutral); and
  • Red: will see big drawdowns (depreciate).

Robert Falcon Scott Strategy:

Robert Falcon Scott Strategy positioning.png

Robert Falcon Scott Strategy classification.png

We are relatively well positioned (see graphs above). Current exposure of around 95% will be increased to around 130% over the next few weeks (we have been holding out on increasing the exposure and will see how this situation plays out). The strategy could depreciate but only between 1.5% and 2.5%.

Sir Edmund Hillary Strategy:

SEH strategy positioning.png

SEH strategy classification.png

We are relatively well positioned (see graphs above). Current net exposure of around 102% will be increased to around 136% over the next few weeks (again, we have been holding out on increasing the weight and will see how this situation plays out). The strategy could depreciate between 2% and 3%.


Sir John Ross Strategy:

SJR strategy positioning.png

SJR strategy classification.png

SJR is well positioned with its short holdings but might suffer some shocks due to a higher weight within the red classification. (see graphs above). Current net exposure of around 87% will be increased to around 103% over the next few weeks (again, we have been holding out on increasing the exposure and will see how this situation plays out). The strategy could depreciate between 1% and 2.5%. The lower net weight will reduce return volatility.

Summary:

  • We are relatively well positioned and not in the same position we were in with Nenegate;
  • There is scope to icrease our gold exposure and even add more platinum. (Gold will be a short term holding if we decide to add it to the portfolio - Sibanye will be the most likely choice);
  • Shares sensitive to the interest rate (credit repayment from clients) like TFG (Foschini), Truworths and Mr Price will have big drawdowns but Mr Price should be more stable;
  • Local banks (we only have Capitec in our portfolio) could depreciate by over 10%;
    • Indirect effect - due to diminishing confidence in our economy and lower growth these shares will also experience lower growth over the medium to long term; and
    • Direct effect - Junk status and a higher probability of loan default/delinquency.
As always thank you for your continued support and happy investing.

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