Positioned to ride out some of the current volatility

The financial turmoil experienced by global markets in recent months is not yet over and the economic outlook remains highly uncertain in the near term. In the longer term, however, we anticipate that reflation measures taken by global central banks and fiscal authorities will begin to gain traction. We are also of the opinion that, for the most part, emerging markets are structurally sound and that the economic woes being faced right now by these economies are cyclical in nature. On this basis, we regard the long-term outlook for commodities as positive.

In the short-term, however, uncertainties abound. Given the current situation, we believe that the BJM core equity portfolio is well positioned to ride out some of the current volatility and will benefit once we begin to see improvements come through in key economic fundamentals. The make-up of the portfolio is influenced by the need to retain a defensive bias with exposure to the likes of large multinational shares, food retailers and food manufacturers, which are reasonably stable from an earnings and cash flow perspective.

On the commodities front, while we are underweight relative to the resource heavy JSE All Share Index, we nevertheless have meaningful exposure to the sector. This is on the back of our assessment that commodity prices are likely to recover on both a resumption in demand from emerging market economies further down the line, and a natural supply side response to an environment where a lot of global commodity production is taking place at prices below cash cost. Our focus in this area is on those companies that operate at the low end of the cost curve. We are also optimistic on the long term prospects for energy, in line with our view that energy hungry emerging market economies remain structurally sound and will ultimately recover from cyclical weakness.

As far as financials are concerned, we are of the opinion that South Africa is in relatively good shape. Interest rates have started to fall and will continue to do so throughout the course of this year and into the next. We are looking for an upturn in the SA economy in 2010 on the back of these lower interest rates and of course spending surrounding the World Cup. Lending should also begin to recover and bad debts should start to diminish further down the line. Currently we prefer the business models of banks to life assurance companies.

Industrials are a mixed bag. We retain an interest in the construction sector, but recognise that this area is sensitive to economic slowdown. Government spending is unlikely to slow however and order books are likely to remain healthy for some time to come. We continue to favour the more conservatively run businesses. We also have exposure to what we call our “picks & shovels” stocks, which provide supplies to infrastructure projects. Within industrials, we also favour interest rate sensitive counters, which should benefit as the consumer environment improves.

Of course, it should be realised that we remain very much a valuation centric organisation. In other words, while we have to like the fundamental drivers behind our selection of stocks, we also have to like the prices that these shares trade at. This is the case for all the counters that make up our core equity portfolio.