Market volatility: what does it mean?

Paul Stewart, head: fund management at Grindrod Asset Management.

In light of recent market volatility, Paul Stewart, head: fund management at Grindrod Asset Management, shares his views on the markets and the rand – and gives insight into the opportunities for investors.

1. What is happening in the markets? What is the likelihood of South Africa experiencing another year like 2008?

The recent volatility of the ALSI (down in October and up in November) has been driven by similar movements in equity markets all around the world. Markets have been climbing to somewhat elevated levels for some time now and the performance of equities since the bottom of the market in late 2008 post the global financial crisis has been very strong.

Markets are no longer cheap by any definition. However, forward-looking scenarios still do not show a world that is in strong recovery and growth is hard to come by. The US is the one bright spot, but even in the US questions linger about the sustainability of the US recovery when the Fed starts the inevitable process of normalising interest rates in 2015.

The rest of world is characterised by slow growth, monetary policy restrictions (especially in the Eurozone), slowing growth (in China and other emerging markets) and geopolitical risks (Middle East, Russia and now Hong Kong). When added together, these concerns weigh upon the sentimental aspect of investors and cause an unravelling of prices.

Is this downward move in markets likely to be sustained and become more serious as in 2008? Of course nobody knows, but until the market has clarity on whether or not the European Central Bank (ECB) will support the Eurozone via some formal quantitative easing, it is likely that the market is going to back central bankers coming to the rescue again. The US Fed may even leave rates lower for longer in support of synchronised recovery. The recent announcement by the Bank of Japan in late October of a stimulus package of unprecedented size has certainly given some cheer to markets, which rallied on the back of the news.

2. Internationally, the Eurozone seems to be slipping into recession. What impact will this have on the South African economy?

The Eurozone creates a large risk to global growth as it is a large production and consumption zone and, from a South African economic perspective, is closely aligned in terms of trade.

The Eurozone desperately needs structural reforms and some pro-growth policy, but austerity and cost cutting remain the order of the day. The market is tiring of the posturing of the ECB and requires some concrete actions now to show a commitment to getting these economies back on the growth path again.

At present it does not appear that the ECB has the necessary support from Germany to pass the required legal and political changes to deliver on a growth mandate. As such, the Eurozone may well remain a low-growth area characterised by declining influence for the foreseeable future.

3. What are the reasons for the rand’s decline? What is the outlook for the rand?

The rand recently declined against the US dollar, as have many other “commodity currencies” such as the Aussie dollar and Brazilian real.

The real issue at play has been the strengthening US dollar versus all other currencies in anticipation of rising interest rates and improving economic confidence in the US, rather than rand-specific issues. Having said that, the rand also has some additional and unnecessary headwinds like a deteriorating budget and trade deficits, anaemic growth and policy instability in South Africa’s important and large scale employers like mining and agriculture. The rand does appear “oversold” at above R11/US$, but it may weaken further if it gets some negative momentum. I would bet on weakening bias for the rand for as long as the US authorities allow the dollar to strengthen.

4. Is this a buying opportunity?

We would only answer that question in terms of the yields and growth rates on offer in different assets. Even with the recent 10% decline in equities, certain shares and listed property still look expensive.

Conversely there were securities which, by our metrics, appeared reasonably priced even before the recent losses and looked even better value after the fall. Much of this value has been taken off the table with the recent rally. So, depending on your requirement the answer will vary. Grindrod Asset Management still thinks relative to inflation, which at 5.9% is above money market rates, that one is forced to hold more quality risky assets if the outcome of beating inflation remains uppermost in the investor’s mind.

5. Where should investors be investing currently?

Good quality South African and global equities and listed property securities that pay regular and consistent dividends and have shown a consistent trend in growing these dividends over time will be preferable in such an environment. We call these securities Payers and Growers®.

6. What should investors keep in mind in market conditions such as these?

Investors should remember they should be building up a passive income stream from their investments, and times of market declines provide ample opportunity for investors to buy good quality investment at lower prices. Investors should also remember that timing markets is very difficult, so provided that you are buying the right assets with good quality income streams, this is a very forgiving strategy that stands up to scrutiny over time.