Is There Hope Beyond The Current “Blood On The Streets”?

Before we can look forward to the rest of the year, let us just do a quick recap of 2018 so far:

 

 

Quarter 1 2018

Domestic sentiment was very positive to the new administration for South Africa and that boosted local South African based stock (SA Inc).

The Rand strengthened all the way to +- R 11.50. This was to the demise of rand hedge industrial stocks.

 

Quarter 2 2018

The performance profile of Quarter 1 was completely reversed

The local sentiment fizzled back and emerging markets took a beating because of the softening growth in China and uncertainty about trade wars.

The USA on the other hand experienced very strong performance even though already on very expensive valuations

 

Quarter 3 2018

The debt and currency crisis in Argentina and Turkey aroused global investor worries that this would spread out across the entire Emerging markets. Thus Emerging markets sold off aggressively, while investors fled to the US capital market.

In a quarter where liquidity was key, as investors sought refuge in the US capital market, the highly liquid nature of South Africa’s capital market saw it being one of the most aggressively oversold equity markets in the world.

Making matters worse for the South Africa equity market is that some index-heavy weights had enough issues of their own to face. MTN for one, was sold off aggressively after facing notable issues in Nigeria, while Naspers on the other hand was sold off aggressively as its underlying holding Tencent was confronted with adverse regulatory issues with Chinese authorities.

 

Quarter 4 2018:

Thus far in 2018 (October 2018), the market has turned aggressively against investors who sought the refuge of the US capital market. The USD$ has largely been week, US Bonds have sold off aggressively, while the US equity market is seriously on the back-foot. Most other markets have suffered in line with the US markets that is down.

 

What Next?

We have seen a substantial reversal in underlying valuations of assets across the globe. In South Africa for one, all local asset classes are now trading at cheap valuations, suggesting that investors have to be bold enough to hold to their investment asset allocations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If underlying fundamental valuations have proven over time to be a reliable indicator of prospective returns, then the attractive valuations above suggest that the biggest risk facing global investors today, is “better than expected bad news” or “outright good news”, as the valuations above are synonymous with extreme levels of sentiment.

 

With the risk of an economic recession remaining low in the current environment and local valuations being attractive, you should have a decent allocation to growth assets.

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