Edition: March - May 2015
It’s all about energy!
IN SA, two energy-related themes are playing out. First, the positive: The oil price dropped from above US$100 per barrel to below US$50 in a short time. Several reasons are advanced, amongst them the largescale switch from oil to gas in Europe and North America; the unlocking of new sources of oil and gas sources around the world, and a fall in demand from China.
The lower oil price makes many new projects that are being developed (e.g. Sasol’s US$7bn project in Louisiana, USA) less profitable or even unprofitable. The effect could be seen in the Sasol share price which until recently was a favourite in many reputable investment managers’ portfolios.
The low oil price has a positive effect on the SA economy. It cuts down on the monthly household fuel bill. And, provided businesses pass on the effect of lower fuel prices, this too will put more disposable cash into consumers’ pockets.
Second, the negative: where Eskom finds it difficult to provide SA with consistent and stable access to electricity. In a worst-case scenario, without running the diesel generators, demand for electricity may exceed supply by as much as 17%.
Running the cash-guzzling diesel generators changes the scenario slightly. But demand could still exceed supply by 10%. Loadshedding, when implemented in phase 2 or 3, could shave a significant portion off SA’s 2.3% gdp growth forecast for 2015.
The situation may last longer than we have been led to believe. The worst part is that many industrial and mining investment opportunities will likely not see the light of day, having an effect over the longer term. Mining projects typically require more than 10 years to make a return. Without certainty on electricity supplies, it will be more difficult for CEOs to invest capital.
Then there is developments in currency markets. While the US$ remains strong, the euro continues toweaken. The Swiss de-coupled their franc from the euro and caused havoc in currency markets overnight. This is related to the large scale of quantitative easing, increases in money supply and the low-growth scenario in Europe, lowering relative value against other currencies.
Europe is still an important trade partner for SA so it makes our exports to Europe less competitive. But his may support the SA bond and equity markets to some extent.
The Russian rouble weakened by more than 80% in 2014. While this may not necessarily affect SA directly, there is still the risk of contagion when investors wish to withdraw from emerging markets as in 1998.
In 2014 the initial strong performance provided by shares gave way to a more modest 10.9% increase for the year by the FTSE/JSE All Share Index. The performance to the second half of 2014 was -0.8%.
The more conservative FTSE/JSE Shareholder Weighted Index (SWIX), which has a lower weighting to resources companies, provided a return of 15.4% in 2014 (only 3.2% in the second half). Amongst the first-tier sectors, Resources were down by -14.7% for the year (-25.1% for H2 of 2014); Industrials were up by 7.0% and Financials by 27.3%.
A defensive approach to the domestic share market would have worked best in these circumstances. Star sectors during the year included Food Producers (+43.0%) and Pharmaceuticals (+42.6%).
The domestic interest-bearing market provided a comfortable 10.2% return in 2014. Despite the negative return in December, bonds fared well as the likelihood of lower inflation was discounted into bonds’ prices.
The rand closed 2014 at R11.45 to the US$, which means that the rand depreciated by 10.6% during the year. Barring unforeseen events, we expect relative stability to prevail.
Investment returns achieved by asset managers are presently more modest than in the past. This is mainly the result of economic reality (slow growth) catching up with overheated share prices.
The average investment return achieved by the risk-profile peer groups below shows that smoothed-bonus guaranteed portfolios still achieved better investment returns over the past year than risk-seeking portfolios, largely as a result of the reserves of positive investment returns built up over the past two years being released.
In the fourth quarter of 2014, risk assumed by investment managers was not rewarded as moderate portfolios (e.g. absolute return portfolios) achieved better investment returns than aggressive balanced portfolios.
Changes in the investment environment resulted in significant shifts in the relative positioning of results achieved by bellwether investment managers. The sudden drop in the oil price affected the Sasol share price by -30% in the fourth quarter of 2014 and by approximately -45% from its top in June 2014 to its low in January 2015.
The results produced by investment managers with large exposure to Sasol, a popular selection amongst value investment managers, were generally weaker than the results of investment managers with low or no exposure to Sasol. Typically, the SWIX has 2.6% exposure to Sasol while Allan Gray Equity’s exposure to Sasol was 10.3% in December 2014.
For this reason, Allan Gray Global Balanced Fund– popular in a member-choice environment -- slipped down the relative rankings in December 2014 with a return of -0.85% for the quarter and 10.3% for the year. For the same period, Coronation Managed Portfolio achieved 2.5% over the quarter and 11.2% for the year.
In the peer group, Investec Balanced achieved the best performance for both the quarter (4.2%) and the year (13.3%). Foord Balanced achieved commendable investment returns (3.2% for the quarter and 11.0% for 2014).
Foord and Coronation consistently appear in the top quartile and Re CM and Allan Gray consistently appear in the bottom quartile.