Cannon Asset Managers: Making cents of China cool-off

By Cannon Asset Managers

Compiled by Samantha Pauwels & Rynel Moodley

Highlights

 The South African Reserve Bank left interest rates unchanged at 5.75%. “The lower inflation path gives us some room to pause in this process (hiking rates),” Bank governor Lesetja Kganyago said. As the country benefits from a low oil price, rates are widely expected to be kept on hold for the year. The Reserve Bank now expects consumer inflation to average 3.8% this year, compared with the 5.3% forecast previously, and to remain within the 3%-6% target band for the next two years.

Local Producer price inflation slowed to 5.8% last month from 6.5% in November. Slowing international oil, food and agricultural crop prices are the main reason for the improvement in SA’s inflation outlook.

South Africa’s private sector credit demand grew 8.52% year-on-year in December, down from 9.13% in November. This was slightly below the 9.3% expected figure and once again illustrates the challenging environment within the economy.

Graph of the Week

China Cooling Down

As central banks around the world flush economies with money, unexplained flows have increased. This “hot money” moves in and out at rapid speeds, causing uncommon volatility in trade balance accounts across the globe.

China’s unexplained capital outflows reached a record high level in December, despite strict currency controls. The adjacent chart illustrates the increased volatility as well as the trade balance sensitivity to these aggressive flows, not to mention the instability in China’s currency market.

The crackdown on official corruption early last year might suggest possible reasons for the outflows, as fat cats whisk their money out of the country to avoid scrutiny.

Previously, Chinese regulators complained about illicit flows entering the mainland when over $400 billion poured in since 2006 – as low interest rates persisted in America. Chinese officials are sure to be even less pleased now that the hot money is rushing out the door.

Quote of the Week

“The price at which a stock sold four years ago may have little or no real relationship to the price at which it sells today. The company may have developed a host of able new executives, a series of new and highly profitable products, or any number of similar desirable attributes that make the stock intrinsically worth four times as much in relation to the price of other stocks as it was worth four years ago.”  ~ Philip Fisher

Commentary

The start of a new year is an ideal time to screen for attractive buying opportunities in the equity market. According to a research note published by JP Morgan, South African Value stocks have been out of favour in 2014 and are now trading at a record discount to the South African Growth basket. JP Morgan notes that Growth stocks have been supported by low interest rates globally and in South Africa and that a resumption in the bond yield up trend could support Value stocks’ outperformance. The price to book ratio of the South African Value vs. South African Growth basket is currently trading at one of its record lows of just under 0.5. – Source: JP Morgan SA Equity Strategy, January 2015

Cannon Media

These days there are only a handful of real value investors left in the country. To position yourself for the value cycle is to stay true to the ethos of value investing. These are words from our Chief Investment Officer, Dr Adrian Saville in an article published in Finweek. Read here for more: http://www.cannonassets.co.za/content//Is%20it%20the%20end%20of%20the%20road%20for%20value%20investing%20Financial%20Mail%20January%202015.pdf