Magnus Heystek looks into his crystal ball: Where will the JSE head in 2014?
The JSE has had a stellar run over the last few months, but it can't rise forever. Heading into the new year, the stock market will face some major headwinds, including the threat of Fed tapering, and potentially continued rand weakness. Brenthurst Wealth's Magnus Heystek reckons that Fed tapering, which is almost certain to kick in next year, is likely to be a drag on the South African stock exchange, and he also argues that there is still good reason for South Africans to invest offshore, despite the weak rand. – FD
GUGULETHU MFUPHI: To get a more in depth view of how the markets are trading today, Magnus Heystek from Brenthurst Wealth joins us. Magnus, passion on the markets – it's not something that is coming through, the JSE's rather flat today, there were no major movements. Yesterday we saw quite significant amount of profit taking.
MAGNUS HEYSTEK: Just remember that we've had a fantastic three to four months. Markets have been running very hard. The JSE's had record levels very close to that. We cannot expect it to just keep on running. There must be some profit taking and I think many investors are looking at valuations and thinking 'well, maybe we should have stepped back a little bit'. We're waiting on some news from the United States about tapering, a little bit of caution is not a bad thing sometimes. We've had a fantastic run this year.
GUGULETHU MFUPHI: Are you worried about tapering?
MAGNUS HEYSTEK: Yes, how exactly are they going to taper? Even the Fed is worried about this. If you read their website, they're starting to stress test many of their banks to see how they would react to increases in interest rates. I think the IMF is looking at it and South African is also looking at the impact of tapering. However, what is very important to know is that it's not a once-off thing. Tapering, or the QE Program has been going for five years and four trillion dollars have been pumped into the world system. You cannot remove that overnight. It is going have to be a three to five year phasing out. If the impact is going to be on the market, it's more likely to be over time, and I think analysts will be watching the big flows of capital in the world: the dollar versus the euro, and the yen playing a role. Look at the big moves. The consensus seems to be that the dollar will probably strengthen over time in line with rising interest rates. In addition, the US economy is powering ahead very nicely. There's a lot of money flowing back to the United States.
GUGULETHU MFUPHI: It almost sounds like an animal on drugs, Alec – the global economy and the stimulus.
ALEC HOGG: It's completely on drugs – we know that. It's like 'the patient's dead, but give him another adrenalin shot – why not'.
MAGNUS HEYSTEK: At some point, you have to take it away, and many economists are trying to work out what's going to happen to markets. Every fund manager I speak to…they're not sure. They think this might happen or that might happen. In addition, the way the Fed will announce and implement the tapering, is also going to be very important.
ALEC HOGG: You have Obama's pal now – even more of a pal – Janus Dillon. Bernanke, at least, was from a different school. If Obama wants the next President of America to be a Democrat, then tapering is going to be rather modest. Many people think so. Who knows when it's going to come? Those are big issues for – far smarter minds than ours are. You are a man who's done so well by advising your clients over the years to take money offshore. If you have a look at where the South African rand is at the moment, relative to other currencies, are you still in that frame of mind?
MAGNUS HEYSTEK: I was hoping you weren't going to ask that question, because while you're ahead you pray to your luck, but three years ago, we took the view that the rand was too strong. At R6.50, even the government said it's too strong. We have Pravin Gordhan saying it's too strong and there were other factors, so we started moving out three years ago. At ten rand you're not going to see another 60 percent slide over three years, but today it's a question of valuation and diversification. One must remember that South African investors have historically been very exposed to South African companies. That's what they know and those are the asset classes that have done very well for them. Now we're in a bigger world, and there was a reluctance until recently, to move outside of the comfort zone of South Africa. People are now looking at things we don't have in South Africa. Biotechnology for instance: that's been 150 percent in the last three years.
ALEC HOGG: But real basic stuff like ETF's on the SMP500 or the FTSE: are you finding that your clients are…? Sure, it's hard to go and buy technology. You don't know what's going to happen there. However, the big picture – the big exchange-traded funds: are they moving more money off?
MAGNUS HEYSTEK: They are – indeed. I spoke to some of the big institutions this week who told me that their volume of flows going offshore has doubled in the last year compared to a year ago and two years ago, and we see it in our business. Clients are saying 'I need more offshore exposure'. Three years ago, we had to convince them that they needed offshore exposure. Now the demand is coming from the clients and we need to caution them, saying 'you're not going to get the same returns, because your returns have been phenomenal'. We say 'you're diversifying out of South Africa' (1). My view remains that the rand is a weak currency and tapering could or would, probably weaken the currency a bit more. Of course, we have other economic factors like business confidence at 20-year lows, consumer confidence at 20-year lows, and the economy's not doing great. There's a very nervous feeling in the market.
ALEC HOGG: Where do you get the 'business confidence at 20-years low'? We've been listening an talking to people for the last two days.
MAGNUS HEYSTEK: RNB
ALEC HOGG: No, they were here yesterday. Anyway, you wrote a piece about the fragile five and I guess from that perspective also, one gets a bit worried.
MAGNUS HEYSTEK: Well, the fragile five- we picked it up a couple of months ago already. I think it was JP Morgan or Morgan Stanley that was saying five countries have twin deficits: current accounts/posted deficits. They're the vulnerable countries, and they've been fairly spot on. If you look at the movement of global markets – especially emerging market currencies – so far this year, those fragile five have dropped the most relative to the dollar and to other emerging countries. Other emerging market countries have actually gone up. South Korea has gone up. Singapore has a strong currency. I think the world has figured out who's vulnerable and they're now going for those countries. Unfortunately, as you well know when the big money is against you it's very hard to defend a currency.
ALEC HOGG: We're like a core coronation, aren't we? It's less than one-half of one percent of the global GDP. If they want to hit the rand…goodnight.
MAGNUS HEYSTEK: They do it. You can see it in small day-to-day movements that they do play the currency quite a lot. I think we're the 15th most liquid currency in the world or round about there. They know there's an active market in currency. If they want to play it, they do. They sometimes use the rand as a proxy for other currencies that are not as liquid. There's a bigger element of manipulation of our market, and profiteering on our market.
GUGULETHU MFUPHI: Is that a good thing?
MAGNUS HEYSTEK: its markets. Those are markets. Do not try to interfere and regulate those markets. The markets will crush you.
ALEC HOGG: The Malaysians tried it, others have tried it, and it doesn't work. Even the British tried it and Lord Sorenson made a billion pounds.
MAGNUS HEYSTEK: A billion pounds but that subsequently…everybody forgets that two years later he lost 700 of that billion when he tried to do the same against the yen. People forget that little story.
ALEC HOGG: The Japanese are a lot more powerful than the British are.
MAGNUS HEYSTEK: He lost 700 million two years later and the reason I know it, is I had to interview him when I was a journalist at the Star when he was here in South Africa once. He said 'well, I gave some of it back'.
ALEC HOGG: Thank you, Mr Sorenson and Mr Haystek.