Novare reviews Equity Market for Business Day

Business Day interviewed Francios van der Merwe, Head of Offshore Investments, Novare on the status of South Africa’s Equity Market.

Can we expect equity markets to remain volatile this year?

Investors grew used to unprecedented low volatility levels in financial markets from 2012 until 2015. This was due to synchronised monetary policy stimulus from the major central banks.

De-synchronisation, due to diverging monetary policies amongst the major developed market central banks (the US embarked on monetary policy normalisation whereas the European Central Bank and Bank of Japan is still committed to extra-ordinary monetary policy measures) and varying speeds of economic growth rates between developed and emerging market economies (the pace of growth for developed economies is on a stronger path whereas that of emerging markets decelerated) will mean that normal to higher levels of equity market volatility will remain.

Daily global equity market movements have been very closely correlated to upwards or downwards movements in the oil price since November 2015. Unless the oil price recovers, this pattern looks set to continue over the near term.

What themes will investors be looking at?

Global investment themes are set to dominate the local market. This will include the pace of US interest rate hikes this year (primarily impacting the dollar), whether the Chinese economy can rebalance and stabilise (important for emerging market growth and commodities) and whether the uncontrolled oil price free-fall will end (impact on equity markets).

Which sectors on the JSE are likely to see the best returns?

The rand hedged shares will probably outperform this year. The risks remain for the rand to depreciate
instead of appreciate this year. This is due to the risks of capital flight as the US hikes interest rates, the persistently large local current account deficit as well as the looming credit rating downgrade to junk status.

Resources company share prices could experience a bounce from current oversold levels, but the commodity outlook remains uncertain due to continued excess supply levels in key commodities and such
a bounce would prove unsustainable.

Which sectors on the JSE are likely to see the worst returns?

Domestic orientated cyclical companies that are dependent on consumer demand will struggle this year as rising inflation, more expensive food prices and higher interest rates bite. Additional detractors to
consumer spending will be the weak employment backdrop and tighter credit extension from banks to households that failed to deleverage sufficiently during the low interest rate period.

Will equity markets around the world follow similar trends?

The main themes described above will drive global equity markets, but there should be more opportunity
for stock selection due to a greater focus on company earnings to drive investment returns than just
equity market revaluations. The period of “rising tide lifting all boats” is over and fundamentals will play a larger role in equity returns.

Describe in one word what you believe the 2016 year will be like.

Divergence