The rand could derail the 2011 consumer party
It’s funny how markets work. The moment you think the worst is behind you a new threat looms on the horizon. As we power through the first quarter of 2011 it seems inflation is raising its ugly head again. We’re at the mercy of the local currency, rising energy prices and soaring food prices. Brent Crude oil – a major component of the domestic fuel price – is pegged above $100 per barrel and the United Nations has just issued a statement warning that global food prices are at “dangerous” levels! Is it time for local consumers to seek shelter again?
One way to gauge prospects on the domestic market is to consider the mood among the country’s largest asset managers. To do that you can turn to the first Investment Solutions Asset Manager Survey for 2011. Twice each year the provider of multi-manager investment portfolios, with R170 billion under management, publishes market views and expectations from 15 of South Africa’s largest asset managers. The first survey this year suggests managers are reasonably confident in stock market returns, but mildly bearish on prospects for the rand. Approximately 80% of managers surveyed said the rand would trade between R7.25/$ and R8.50/$ by year end. They may have been more bearish had the survey been conducted today, with the rand already 30c softer against the dollar year to date.
Forget stellar stock market returns
Results of the Asset Manager Survey should be taken in context. It’s common knowledge that forecasting price levels for stock markets, currencies and commodities is a mugs game. We’ll use the first-half 2010 survey to illustrate the point. Back then 93% of the managers surveyed didn’t expect the JSE All Share index to close 2010 above 30 000 points… Today – with hindsight – we know it closed at 32 119. The price levels offered by these asset managers are, at best, educated guesses as to where locally listed shares will be 12 months hence.
Thobile Thukani, market and economic researcher at Investment Solutions, said that 60% of fund managers were “mildly bullish” on the JSE All Share index through 2011. These managers estimated the market would end the year between 34 000 and 37 000 points. They’re saying we can expect “middle of the road” performance from the JSE this year, because the top estimate represents a miserly 15% nominal return from equities. On the low end, even those with positive equity outlooks expect nominal returns of only 5%! That’s not good news when we consider the inflation pressures a weaker rand will introduce locally.
A third of the asset managers surveyed expect the JSE to wash sideways over the next year, predicting price levels of between 30 000 and 34 000 points. Remember, anything below 32 119 points renders a negative return. The 7% who were “mildly bearish” said we could expect the market to end anywhere between 26 000 and 30 000 points, a nominal return of between -6% and -19%. I must admit to being a trifle puzzled how a “mildly bearish” view would see the markets down almost 20%...
The mood favours offshore equities again
“Not one of the asset managers surveyed was bearish on prospects for international markets,” said Thukani. An impressive 71% of the sample said the US S&P 500 index would end 2011 at between 1350 and 1500 points. The balance expected the index to provide a “neutral” performance between 1250 and 1350 points. This echoes their bullish stance on GDP growth. “The majority of managers revised their economic growth forecasts upward for SA, UK, Europe and the US,” he said.
Ironically the local fund managers are more bullish on local GDP than they are on equities. They’re split 50:50 between the crowd gunning for 3% to 3.5% GDP and those pencilling in 3.5% to 4.5%. The economists I’ve spoken to this year would probably favour the more conservative of these estimates, and I’ve even heard from some who think we’ll struggle to achieve 3%.
What about commodities?
South Africa is all about gold, platinum, iron ore and a basket of other base metals. And we depend on a stable oil price to keep local inflation in check... The asset managers surveyed expected gold to end the year anywhere between $1100 and $1450 per ounce, but I doubt many of them had factored in the growing civil unrest we’ve witnessed in Egypt and other economies since the beginning of February. Global unrest always boosts the gold price slightly.
The asset managers were surprisingly soft on the outlook for oil given the fossil fuel’s penchant for massive price spikes. Halfway through 2008 the commodity surged $40/barrel in the space of four months to trade at its all time high, north of $140/barrel. As we enter 2011, 57% of managers surveyed said oil would trade between $90 and $100 per barrel by year end, 29% said the price would fall to between $70 and $90, and only 14% stuck their neck out on a high price of $120!
Editor’s thoughts: Whichever way you unpack the Investment Solutions Asset Manager Survey, South Africa Inc’s performance through 2011 hinges on the rand. If it slips much further than its current R7.30/$ we’re going to see inflation making a quick comeback. And that means interest rates could be hiked way before analysts expected. Would you be surprised to see a massive spike in the CPI inflation measure through the first half of 2011? Add your comment below, or send it to [email protected]
