The extreme volatility with which the global equity markets started this year is likely to continue, according to Terence Craig, Chief Investment Office (CIO) at the Cape Town-based Element Asset Management.
“We have identified a number of contrarian ‘surprises’ which are, by definition, against the consensus view. These may play out in 2015, but may take longer – investors should consider factoring these into their portfolio construction,” Craig said.
Ventures Africa has opted to publish only five surprises of this year and beyond. These cover mainly South Africa and other parts of the globe.
The South African misery index to worsen
This will worsen this year, Craig said. Misery Index was created by economist Arthur Okun and in its simplest form is the sum of a country’s unemployment rate + inflation rate. The higher the number, the more “miserable” the country, Craig said. It is generally acknowledged that unemployment causes more “misery” than inflation, which is not good news for SA.
In a September 2014 Bloomberg article, South Africa was rated the second worst country in the world behind Venezuela on the Misery Index. “We believe that it is possible for South Africa unemployment rate to increase in 2015 resulting in a worsening of the index rating,” Craig said.
SA’s credit rating will be downgraded
Craig said there are a few key areas that should be watched this year as these might provide the catalyst for another downgrade by the rating agencies.
These include industrial action, wage settlements, government debt levels, power problems and water problems.
“We do not expect another Platinum strike, but AMCU could well try and test other Mining sectors (e.g. Gold),” Craig said. “A lengthy public servant strike would be very negative. If these are too far above inflation (e.g.10 percent) this will likely be viewed negatively by the agencies. Further delays in new power stations/further blackouts will be negative. SA’s water infrastructure is in a similar state as its electricity infrastructure. Further problems with availability would be negative.”
The JSE ends the year down
The SA equity market is expensive – it has returned 217 percent since the March 2009 low to end December 2014, Craig said.
That’s 21.8 percent per year for almost six years – an incredibly strong run not forecast at the beginning of 2009. “Our equity market is expensive on a number of levels and is overdue a correction after such a strong run,” Craig said.
JZ retires “ill” to Nkandla
This view appears to becoming more of a consensus for 2015. “Our concern is not if JZ should retire, but who his replacement will be. Deputy President, Cyril Ramaphosa, is from Venda (representing only 14 percent of voters) so may not be the automatic choice.” Craig said.
“We are not of the opinion that ‘anyone will be better’ as this was often mentioned by prominent businessmen when Thabo Mbeki was replaced. You can judge for yourself how that turned out!” Craig adds.
Ireland wins RWC 2015!
Although not that material from an investment perspective, Ireland could surprise in the Rugby World Cup in 2015. As investors we research numbers: Currently ranked 3rd in the world (behind New Zealand and South Africa), beat both South Africa and Australia in November 2014 home series and lost their last game against New Zealand 22-24 in their final game of 2013. “Better stock up on Guinness,” Craig said.
