Markets for first 6 months of 2013

If you have been following the investment markets over the last 6 months you would have noticed 5 very distinct things being:

1.      The South African share market has been very volatile. It has gained 7% at its highest point and lost almost 4% at its lowest point giving it an 11% spread from peak to trough.

2.      The Rand has depreciated 21% against the US$, moving from R8.50 to touch R10.30 at one point.

3.      The US market has outperformed the SA market by more than 16% in US$ terms. Developed markets in general has outperformed emerging markets year to date.

4.      Listed Property and Bonds have been struggling.

5.      Gold, Platinum, Silver and most other metals have been taking a beating.

Looking at the under performing South African market one can name at least two culprits and they are the slowing Chinese economy and the lack of political talent. South Africa is very dependent on countries like China buying our mineral wealth and when there is a slowdown in the demand for our commodities, the price will fall. This will give rise to our imports exceeding our exports which will increase our current account deficit, which will be exacerbated by the weakening Rand due to foreigners taking their money out of South Africa to invest in the rising bond yields in the USA.

Another problem that faces the Rand is the inability of our government to manage the wage disputes and general well being of our economy which gives rise to an increase in the budget deficit, the downgrading of South Africa’s credit rating and ultimately the loss of confidence by international investors.

Looking at the rest of the world we can see a very confused investor public. Whenever there is good news about the growth in the US economy, the market goes down instead of up. This in mainly due to the fear of investors that the US central bank will start closing the tap on free cash. The signs of growth in the US is good news and that is why we have seen the share market outperforming the emerging markets like South Africa. It is about time for the shares in the US to gain some traction if you consider the poor performance for the last decade up to 2010. The US market has outperformed the Emerging Economies by 22% in $ terms year to date!

I am not too worried about the short term volatility in the markets and have been avoiding exposure to Gold, Listed property and Bonds for a while now due to the clear indications that they are either over valued or on the wrong side of the interest rate cycle. I have been telling my clients to increase their exposure to offshore shares because of the under performance of that sector and the strength of the rand over the last couple of years.

I am worried about the situation in South Africa and do not believe that the situation will be resolved over the short/medium term. Investing in South Africa will remain a higher risk investment than some of the developed economies and has recently increased that investment risk. There are two things one should do to mitigate this increased risk and they are:

1.      Ensure a well-diversified international portfolio. Focus on the USA

2.      Be very specific when selecting South African shares to invest in.