Looking back at 2015 and thinking about 2016

Equities

I can almost copy the piece I wrote last year on the same topic. So far we have seen subdued equity returns in South Africa (3.75%) and the same can be said for the USA (1.52%) with France and Germany performing well. The growth in China is still faltering and the resulting effect of the weakness in commodity prices can be seen in the resource companies worldwide.

Anglo American               -59%

BHP                                    -25%

Anglo Platinum                -41%

Impala Plats                     -59%

Exxaro                               -55%

Kumba                               -79%

Lonmin                              -98%

The Resources sector on the JSE is down 37.5% year to date (30 November). As I mentioned at the beginning of the year, selecting the companies you want to invest in will be the critical thing to do. Ignoring the small cap companies due to their high risk profile, investing in the following medium and large cap companies would have made you a fortune:

Steinhoff                           36%

Brait                                   104%

PSG                                     111%

Naspers                             41%

SAB                                     43%

BAT                                    33%

Investing in the Financial and Industrial sectors of the JSE would have given you 5% and 15% year to date. The long and the short of it all is that investing in Equities is not the problem, the ability to select the right share or sector is the clincher.

Currency

As predicted the Rand is 24% weaker today than it was at the beginning of the year. I mentioned that the raising of interest rates in the USA would put pressure on the Rand and now that the increase is very likely in December, the Rand is collapsing. I wish I could say that the Rand should strengthen a bit but unfortunately there is another important factor that should be considered, the SA Government.

Government

In the Business Day of 26 November 2015, there is an article on the front page with the headline that reads “State loses R1bn amid poor controls”. It goes on to say that last year the State (using our tax money), lost R1.2bil due to “fruitless and wasteful expenditure”. Then there is an article on page 8 that reads “SA’s choice: populism or growth”. This article goes on to explain what the current government is doing to the country and I can understand why people are converting Rands to Dollars at R14.40 to $1 and getting out of SA Inc.

MTN and Volkswagen

There are 3 things that surprised me during the year and they were the severity of the Rand collapse, the collapsing of commodity prices and the third one was the shockingly bad management of big multinational companies like MTN and Volkswagen. Just taking MTN as an example. How can you not adhere to the laws of a country regarding the registration of SIM cards? As an investor, we trust the management of the companies we invest in to be honest and diligent. In the case of Volkswagen they actually tried to deceive the authorities regarding the emissions of their diesel engines.

Unfortunately MTN and Volkswagen are not the only companies who violated the trust of their shareholders, there are many more. So now we get into a situation where you can value a company and determine that it is a fantastic investment just to be wiped out by something management does.

Investing in Africa

Nigeria can only be described as a desperate nation when it comes to collecting revenue. After the collapse of the oil price and their currency, Nigeria is in serious trouble and the ridiculously big fine they have given MTN is proof of their desperation. They have also tried to get money from Standard Bank and so they will bleed the companies that actually contribute something towards their existence dry. And then we have to consider huge investments in Nigeria by SA companies like Tiger Brands which had to be written down to nothing due to the lack of profitability.

Nigeria is not the only African country that has run out of money and are targeting profitable companies to bail them out. I will not touch investments in Africa with a barge pole at this stage but still I see companies investing Billions. The only logical explanation is that they are going for the “high risk / high return” scenario.

South Africa is also becoming desperate. Do not be surprised if your taxes are increased and demands made on your assets very soon.

Interest rates

We have seen another rate increase in SA. Inflation is not a problem and it seems like it will remain subdued due to the balancing effect of the low oil price (lower inflation) and the weak rand (higher inflation). It is difficult to justify the rate increases with a GDP growth rate of below 2% so it must be the way the Central Bank wants to protect the currency.

Politics

Jacob Zuma is an incompetent leader and now senior ANC members are talking openly about it in the newspapers. There are two Business day articles that come to mind. On 14 October Tito Mboweni touched on tender corruption as well as land reforms and nationalization. On 2 November Kgalema Motlanthe stated that the “Tripartite alliance is dead”. As I have stated before, there are many very clever people in politics, irrespective of party, who can turn SA from a suffocating endangered species into a thriving country.

So will Nkosazana Dlamini-Zuma or Cyril Ramaphosa replace Jacob Zuma soon or will he be allowed to continue signing anti-investment legislation into law.

2016

If we end the year with the All Share index on the current level of 51 600, we can expect a better year for equities in 2016. If there is a stabilization in the commodity prices and the earnings priced into the star performers of 2015 comes through, we can expect an inflation plus 3% return before dividends. Rising interest rates will detract from investments in Bonds and possibly also some of the overpriced Property companies.

International equities might not outperform SA equities but on a risk adjusted basis due to the diversification properties thereof, I would strongly advise not to neglect this asset class. I have very little confidence in the ability of the Rand to strengthen under the current circumstances but stranger things have happened. I would continue investing according to a strategic asset allocation plan regardless of the level of the Rand.

Summary

Diversify, manage your cash requirements and stay emotionally unattached when investing in 2016.  Make sure you have no debt, be a bit more conservative when investing and make sure you know what you are investing in (or give it to someone who does). The word is becoming a tumble dryer. Just when you think you are up you tumble down again, just to be lifted up again. Remember to spend less than you earn and keep on beating inflation over time.