The outlook for local equities
The world has become an extremely difficult environment in which to make significant macro forecasts. Volatility appears to be rising (even though statistics will tell you it isn’t) and the lack of any global leaders with pragmatism and ethical compasses complicates matters further. Rather than deal with structural issues and practical policies, global leaders instead are pressurizing central banks to cut interest rates to boost growth. This can only deliver short term boosts and its efficiency reduces the more it is used. The side effects are super low interest rates for savers and artificially high asset prices for the wealthy, further exacerbating inequality. This creates the fodder for more nationalist leaders. Rinse, repeat…
In this environment one must be very cautious about getting caught up in asset price bubbles, and chase return at the expense of risk. Market volatility and non-rational market participants means asset price moves can be extreme. As a long term, valuation driven investor this means despite the uncertainty there are significant opportunities in the market. However, to take advantage of these requires a long-time horizon and a stomach for volatility.
After 5 years of very poor returns SA assets are offering a lot more upside, but this is not across the board. There will still be losers in these markets, and one needs to be very circumspect in your stock selection. We are favouring more defensive businesses and those companies with very robust balance sheets. This is important as we expect the economic environment to remain very tough for the foreseeable future.
With low economic growth, and the inability for companies to pass through inflation, government bond yields are now much more attractive. With a step down to junk status effectively priced in, real yields are in excess of 3%. In a risky, volatile environment the prospect of 3% to 4% real return, and a far more capable minister of finance we are much more constructive on government bonds than we have been for many years.
Neville Chester BCom, CA (SA), CFA
Neville joined Coronation in 2000. He has 22 years’ investment experience and is a senior member of the investment team. He currently manages Coronation’s Aggressive Equity Strategy and is co-manager of the Coronation Top 20 and Market Plus unit trust funds.
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