THE rand’s more than 10% decline against the US 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 an d 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%).
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.”
Among South African 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 SA.
“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 a 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.