A volatile quarter
The South African equity market experienced a volatile second quarter and in the end returned negative 0.2% over the 3 months. This volatility was mainly caused by 2 macro events namely: the uncertainty over whether Greece will exit the Eurozone; and the volatility in shares listed on the Shanghai China exchange. Coupled with this commodity prices continued to decline which is a further bearish signal for commodity producing countries such as South Africa, Australia, Brazil and Canada.
Domestic concerns & rand hedges
In our previous quarters feedback letter we highlighted our concerns about the domestic economy. The lack of job creation; the lack of meaningful investment from corporate South Africa; and the low growth as a result of the constrained electricity supply. The recent reduction in commodity prices only adds to the weak local fundamentals and we therefore continue our focus on rand hedge stocks. For example: Reinet (REI) a diversified investment holding company and Redefine International (RPL) a property company mainly in Europe and the UK. We have also identified a large divergence in certain property shares and will seek to take advantage as the spread narrows.
US rate hikes
The markets attention will now return to the pending interest rate hike in the US. Higher US interest rates may lead to the withdrawal of funds from emerging markets and a return to the US dollar. This is another factor which adds to the risk of a down turn in local equity markets and will also add to volatility in the short term.
Focus on offshore earnings
We maintain our view that the domestic equity market is expensive given the abovementioned factors. It is our view that in this market a long only, buy and hold approach will not yield satisfactory results so we will continue with our long short strategies with a bias to holding shares in companies that generate earnings in foreign markets.
The Courtney Capital Team