Time to choose your friends carefully

If I can use the analogy of friendships for shares, 2015 will be a year where having 500 friends will not serve you well. You will have to go for quality instead of quantity!

2014 gave us the following:

South African JSE All Share :   +7.70%
USA S&P 500:                              +11.40% in US$
Cash in SA:                                   +5.00%
Rand against US$:                      Rand weakened 10%

Like with friendships, shares will serve you well until they don't. We have had a fantastic run over the last 5 years (JSE up 108%, the S&P up 138% in Rand) and listed property did even better. But now we are at a point where some of our friends turned their backs on us. This can clearly be seen when we look at resources shares like Kumba, Sasol, Anglos, Exxaro, BHP etc.

2015 will be a year where we will have to analyze the value of our friendships and make sure they are not just superficial tag alongs while the going is good. We will also have to evaluate the change in value, meaning we might find that friends that seemed to disappoint us in 2014 might offer value in 2015!

South Africa will battle the incompetence of our political leaders and we will continue the downward spiral of load shedding, budget deficits, corruption and imaginary repatriation of wealth. The one pillar of strength, SARS, is also faltering and what a disaster this can become. Like I predicted for 2104, we will struggle to beat inflation on the JSE. The Rand will remain under pressure and the only positive will be the lower oil price which will counter the falling Rand and protect us from rising inflation and hence interest rates.

USA will continue the strong growth and provide the stability in a faltering world economy. It is just insane to have the 10 year Bond yield trading at below 2% and this cannot carry on for much longer. The share market has performed very well but now the earnings will have to support the elevated prices or we can see poor returns from the US equity markets as well. Watch out for the first interest rate increase, it will drag the market down!

Europe is back in recession and deflation is looming. If the EU cannot stop the slide in economic growth, we will enter a game with new rules and as with any uncertainty or unknown, the markets will become negative. Europe can be the place where individual stocks perform because they have been beaten so badly.

China will have to come back to the party. This is a friend that South Africa depended on so much but with the slowdown in its growth and thus the decrease in their demand for our resources, they have abandoned us.

So in 2015 I believe that we will once again see a share market with lots of ups and downs, where individual companies will perform well but on average you will not get a lot of joy. Cash will be king in the short term and used to buy into share weakness. If we get lucky and the Rand strengthens to say R10.50 to the $, buy $ and take it offshore. Wait for weakness and buy international shares.

We live in a world where things can swing both ways. We cannot take all our money off the table and become fearful, but we can also not become a blind believer and invest all our money. Remain a long term investor and be patient. However, choose your friends carefully!