Ashburton Investments’ major investment themes and how they are playing them

Wayne McCurrie, Fund Manager at Ashburton Investments.

1) Rand strength

The Rand is a structurally weak currency for many long entrenched reasons. And unfortunately the Rand does not weaken consistently. Normally it collapses for a few years, stabilises for a while and then the weakness starts over again.

At the start of 2016, we had a number of negative events occurring at the same time which resulted in a steep fall in the Rand’s value namely:

A collapse in the commodity price cycle

Drought reaching its apogee

Political turmoil at the worst levels in 20+ year

Rising inflation and interest rate

Depending on what valuation criteria you used, it was between 30% and 40% undervalued at the start of 2016. Therefore from this level you were bound to get some sort of recovery, which is what we are seeing now. Currently the Rand has recovered from this oversold level and is now approximately at fair value. While we could see some continued strength, the majority of the recovery has already happened.

Ashburton’s reaction

We repatriated assets from overseas at a weaker Rand level. We also bought SA bonds, based on the value we saw in local bonds, and was not only a currency play.
We have an overweight position in SA banks based on the strong Rand, improving domestic economic conditions and the possibility of lower interest rates.

2) Resource shares

After having a spectacular bull market runs (on the back of Chinese growth) from 2002 to 2008, resource shares fell dramatically until the start of 2016. At this point share market investors had a very negative view on resource shares, given concerns about a “hard landing” for the Chinese economy.

This view turned out to be unwarranted however as the Chinese government implemented a substantial stimulus package which stabilized the economy. In addition mining companies cut back on loss making production. These factors led to marked recovery in commodity prices. As a result, mining shares have performed spectacularly well over the last 14 months.

Ashburton’s reaction

We have increased our exposure to the diversified mining shares at the expense of single commodity and resource related industrial shares because of improving global economic conditions and a reduction in the oversupply of commodities.

3) Global uncertainty

It is unusual to hear so many global investors, economists and market commentators regularly using the phrase “policy uncertainty”.This is driven by President Trump, Brexit and heightened potential for other European counties to leave EU. It seems as if the first world’s population is just tired of the “Status Quo” and wants something different - even if they do not know what that will bring.

While it is impossible to predict what may occur, as we have not experienced this in the recent past, but are of the opinion that sanity will prevail. There will be no major disruption of global trade and no trade wars will occur. While there will be a lot of rhetoric (hot air from politicians) and some symbolic actions, global trade will remain firmly entrenched.

Ashburton’s reaction

We will continue to monitor this phenomenon, but will continue to evaluate our portfolio positions based on fundamental analysis and interpretation. We will maintain our ability however to react swiftly should the need arise.