As 2005 draws to a close, the FM has asked top fund managers in SA to look back at the highlights and lowlights of this year as well as the risks and opportunities in 2006.
This week's contributors are Gail Daniel, head of equities at Investec Asset Management and portfolio manager of the Investec Equity fund, and Paul Hansen, director of retail investments at Stanlib and portfolio manager of the Stanlib International Conservative Fund of Funds. Part two will be published next week.
Highlights
Daniel: The gold price is trading at levels not seen since 1988 and has finally started rising in all currencies, breaking its negative correlation with the dollar.
The metal is now being driven more by the expected deficit between record jewellery demand and limited mine supply than by currency concerns.
Ironically, the central banks that have been responsible for a lot of gold's weakness over the past five years as a result of reducing their gold reserves are now talking of raising their reserves!
Another highlight for 2005 is the fact that SA is now able to run a current-account deficit without verging on the brink of economic collapse. This is mostly thanks to large direct investment flows into the country this year.
Hansen: There was a boom in commodity prices as well as in rand resource share prices. Shares such as AngloPlat, Implats and shipping business Grindrod, which has been a direct beneficiary of increased trade, have all stood out. But the boom in earnings and dividends on the JSE overall was also welcome.
We also saw the two largest foreign direct investments ever in SA, the R30bn inflow from Barclays to buy Absa and the R16bn from Vodafone to increase its holding in Vodacom to 50%.
For patient international investors the boom in the Japanese market in the second half stood out.
Lowlights
Daniel: Locally, a lowlight has been the fact that many retail investors continued to miss out on the SA market's equity performance, with the Alsi (all share index) having returned 28,2% compound for the past three years.
Globally, one has to ask: is the Chinese currency correctly priced or is China in fact preventing any other country from successfully competing with it in manufacturing?
Hansen: The high oil price and the petrol price hikes - even though they were reversed to some extent at the end of the year - dampened the otherwise optimistic picture of the global economy, as did the ferocious Hurricane Katrina and her sister. The London bombs brought home how dangerous the world remains, as most of us in international investment would have been on those trains at some stage last year.
It was not a great year for investors in the handful of local shares that did not participate in the bull market, such as Sappi, Nampak and Glenrand MIB.
Risks
Daniel: There is a risk that the end of the emerging-market bull run will see capital flow back to the centre, that is the US, to the detriment of markets like SA.
Geopolitical events remain a constant threat. However, world markets are learning to take terrorism in their stride. There will always be a short-term impact, but provided that an event itself doesn't lead to fundamental changes in people's behaviour - that is, stop them from spending - the potential downside should be temporary and limited.
The twin deficits in the US show little sign of being brought under control and remain a threat to the dollar.
Hansen: The biggest risk is still that if the oil price remains high it will eventually have a cascading effect on inflation, which will lead to higher bond yields and hit high house prices in countries where residential property has boomed. This in turn will hit consumer confidence and spending.
The world is still dependent on two growth engines - the US and China - so any slowdown in either of those economies remains a significant risk. For SA the biggest danger is a possible disruptive event, such as the Asian crisis in the 1990s or the Argentine crisis more recently, leading to investors losing their appetite for riskier assets in general, for example emerging markets .
Opportunities
Daniel: Should oil and inflation surprise on the downside, investors will face a more benign investment environment, as an interest rate hike is likely to be pushed out further into next year.
A continued rally in precious metals will allow SA to continue funding the current account.
Finally, if government's fixed investment spending programme gathers steam, job creation will be stimulated, which will also drive economic growth and corporate earnings.
Hansen: There is a good chance that the US will stop raising interest rates next year. Historically this has been positive for the US market, and also for global markets, including SA, which almost all have a high correlation with the US.
There is a possibility that sentiment towards offshore equities could turn quite sharply once negative factors such as the rise in short-tern interest rates and the effects of Katrina fade away.
If oil prices come down further and terrorism is kept at bay, sentiment should be a lot more positive.
