For some time we have mentioned that market valuations have been elevated, not only in South Africa, but also in other parts of the world following the rise in prices.  Although many investment specialists alluded to some form of market correction at some point, the volatility over the past few months has made investors somewhat uneasy.  Despite the recent turbulent environment, the weakening of the Rand has positively contributed to the performance of moderate portfolios.

The anticipation of a US FED rate rise in September and the subsequent decision to leave rates unchanged has not helped the rattled markets due to investor’s renewed concern about the health of the global economy.

Growth in China remains weak, with manufacturing PMI below 50, as it has been for a while, reflecting a contraction in real terms.  There is a lot of excess capacity in the manufacturing sector, which is only useful if this is exported; exporting is only viable if the trading partners grow or if they can take market share from other Emerging Markets.  The devaluation of the currency partly corrects the competitiveness of the Chinese export sector, but the currency, being pegged to the dollar, has been one of the strongest over the last 12 months, way too strong given the fundamental factors in China.  But the depreciation is more about market forces being allowed to determine the fair value for the currency.  In order to gain true reserve currency status, or qualify for inclusion in the IMF’s currency basket, the currency needs to float more freely.

The JSE certainly hasn’t been spared from this volatility, with the last 12 months resembling something of a rollercoaster ride with large fluctuations.  Investors have certainly been jolted around, but from the end of September 2014 to the end of September 2015, the FTSE JSE All Share was 1.7% lower; essentially there has been a lot of noise but without much substance.  Refer to the financial indicators (below/on page _) for the performance of all majors markets, the disappointing returns have been a common theme across most major markets over the past few months.

What is interesting is how asset managers have performed through all of this.  Those willing to be more flexible in their approach have managed to outperform the market.  Although equity funds should not be compared over a 1 year period, the most extraordinary comparison over the past 12 months, is the difference between the best and worst performing local equity funds, with a spread of 57.14%.  This is a good illustration of how wide the range of outcomes can be when markets behave in strange ways.

It is impossible to predict what lies ahead in such uncertain times.  What we take comfort in is the benefits of diversification and our approach to structuring portfolios with a long term goal in mind.  Markets may rise and fall, but the plan is aligned to your long term objectives, we will help guide you through the short term noise by removing the emotion from decision making.  It’s during times like these that the importance of diversification as well as thorough research into the managers’ approach is key.  With a well-structured portfolio in place, now is the time to trust the asset managers to protect capital and identify opportunities.

We trust you find the content that follows both interesting and enlightening.  Should you have any suggestions or queries, please do not hesitate to contact us (info@iwm.co.za).

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