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In his monthly update on major investment markets, David Bacher sees some contrarian light in August’s gloom. The author of the Corion Report shares how his firm is nibbling at Resources stocks after the prices of mining shares, particularly, have fallen sharply of late. He also points out the month’s best and worst performing unit trusts – and highlights the houses attracting money and those losing it. He spoke to Alec Hogg of BizNews. – Alec Hogg
Excerpts from the Interview
Tough Month for South African Markets:
- August was a challenging month for South African markets, with the local stock market down nearly 5% and the Rand depreciating by 6% against the Dollar.
- Negative earnings revisions and negligible economic growth were among the factors contributing to the tough market conditions.
Inflation and Rate Cuts:
- Inflation continues to decline, paving the way for potential future rate cuts, which could have implications for investors.
- Global equities saw a nearly 30% gain over the past year, while South African equities lagged behind at half of that return.
- Financials were one of the few sectors that performed well over the past three months, while resources faced pressure.
The Significance of Resource Sector Timing:
- The resource and financial sectors in South Africa often perform at different times, emphasizing the importance of timing these sectors correctly.
- Timing the difference between financials and resources is crucial for South African investors due to the country’s unique market dynamics.
Resource Sector Impact on Tax Revenue:
- The underperformance of the resource sector can have significant implications for South Africa’s tax revenue, particularly corporate taxes.
- The budget deficit has widened due to weakening commodity prices, leading to concerns about fiscal sustainability.
Opportunities in Resource Cycles:
- Despite the current challenges in the resource sector, investors should consider taking a longer-term view and recognize that commodities will always be in demand.
- Resource cycles have their ups and downs, and being underweight in this sector during a downturn may not be the best long-term strategy.
Diversification Beyond Big Asset Managers:
- Investors and financial advisors are starting to recognize that there are viable alternatives to the large asset management houses.
- Boutique asset managers offer unique opportunities and can be valuable additions to portfolios.
Asset Allocation Strategies:
- David Bacher suggests two key strategies for the coming months:
- Tilt portfolios towards resources: The recent significant drops in resource stocks present an opportunity, and a positive shift in commodity prices could result in rapid recovery.
- Consider South African bonds: With yields on 10-year bonds exceeding 12%, even if the yield remains unchanged, it offers a high real return, making it an attractive option.
Download August’s Corion Report below
- South African markets faced a tough month, with negative earnings revisions and minimal economic growth.
- Resource and financial sectors often perform differently, highlighting the importance of timing these sectors.
- The underperformance of the resource sector impacts tax revenue and raises concerns about fiscal sustainability.
- Boutique asset managers offer valuable alternatives to large asset management firms.
- Opportunities in resource cycles and high-yield South African bonds may be worth considering for portfolio diversification.
In summary, David Bacher provides valuable insights into the current state of South African markets and offers strategic guidance for investors looking to navigate these challenging times. Considerations of resource sector timing and diversification beyond major asset managers can be key components of a successful investment strategy in the evolving landscape.
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