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Little light at the end of the tunnel

29 March 2016 Jonathan Faurie

To say that the investment industry has been experiencing a roller coaster of late is an understatement. In an age where clients are becoming more connected and more educated on their investments, they can become demanding when it comes to generating true value for their money.

This has left investors pulling their hairs out when it comes to looking for ways to find the best place to generate value for clients. At a recent Sanlam Glacier event, it was clearly shown that global equities are not that place.

The stumbling giant

For many years leading up to and following the global financial crisis, China proved itself to be a trailblazer when it came to economic growth. Investment in infrastructure projects was at its height as China prepared to open its doors to the world.

This infrastructure programme was characterised by an insatiable appetite for commodities such as iron, steel, copper and oil. For many years, if investors wanted to find a go-to place to find alpha, they probably would have turned towards equity portfolios because of the sheer rate of growth they experienced.

This has now changed. China has seemingly had a change of heart in terms of the levers that drive its economy, and President Xi Jinping has become adamant that China will now become a consumption based economy rather than an infrastructure based economy.

This has had a major impact on the oil price as China is the second biggest consumer of oil in the world. Kevin Johnson, VP at US based investment firm Dodge & Cox, said that the world needs to come to terms with the new reality that we exist in.

“China will have a major role to play in the oil price going forward. This will ultimately determine the volatility of the commodity as an investment vehicle. While we don’t like to make predictions on what the oil price will do over the coming years, we don’t see the oil price rising above $60/b over the next three to five years. The best it will go to is probably $80/b,” said Johnson.

Shadow games

While volatility has always been an inherent risk in this market, we could be in for a rough ride as the mist of volatility thickens over the market.

This will be driven by factors of supply and demand in the market. According to CNN Money, the largest oil producer in the world is the US with an estimated 13,7 million barrels per day. They are also the biggest oil consumer in the world, but have tried to focus their attention onto shale gas mining as an energy source to fuel their economy.

But James Brown, VP of BlackRock Global Equity Platform, pointed out that if the US sees that the price of oil is heading northwards ($40/b is the price target), it will increase its production in order to cash in on this demand. This will have a detrimental impact on oil as an investment tool as supply will outstrip demand.

Brown pointed out this has had such an impact on BlackRock that the lack of clarity on oil drove the decision of the company to sell the last of its energy stocks.

The local outlook

We are all aware of the situation that South Africa is in and how it can change for the better or the worse without much warning. We are all aware of the challenges that are present in the country; but what is the outlook for South African investment industry going forward?

Mike Soekoe, Director at Foord, pointed out that labour issues will be a persistent worry in the country.

“We still haven’t moved beyond the labour issues that have plagued us in the past. Going forward, workers and labour unions will be working closely to negotiate higher wages with government. Added to this is the level of unemployment that the company faces and the fact that there is very poor job creation in the country. This creates a tense situation which makes investors wary. If you are a South African investor, consider taking your money offshore,” said Soekoe. 

Editor’s Thoughts:
If global equities is not the place to find alpha, then were can it be found? Where are investors looking to find a new safe haven to buffer against volatility headwinds? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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