RAND TURNING POINT
Victor HugoThe biggest market drivers are the Rand, local interest rates and vulnerability of international markets.
As suggested since January, I still think that South Africa is in a sideways or declining interest rate environment on a one- and two- year view, with the stronger Rand buffering inflationary pressures. A combination of South Africa's unique positioning as a resource producer during the positive phase of the long-term commodity cycle, SA a beneficiary of shifting long-term investment flows out of Europe and North America, as well as positive enough local growth factors -- plus a weakening US$ -- means that the Rand can work in the typical technical range $ZAR5.40 to 6.50 area in the next 6 to 12 months and even on shocks - struggling to break above 7.00.
The Rand is doing pretty well against the Euro as well -- and should also strengthen in Euro terms, but perhaps not as fast as against the US$. The strong Rand is great news for the country and long-term investment growth -- although short- term, exporters will feel some pain, until they adjust.
On a six week view I am starting to think that the Rand may just do a strong bounce off the current 6.00 resistance area or off the 5.80 resistance to work towards 6.40 for a while - mainly because so many market watchers are becoming increasingly bullish on the Rand and are expecting 5.80 or below next. Along the way towards the medium- and long- term rational prospects, markets often do differently to what consensus expects. I am also seeing evidence that the recently consistent 27 day cycle, can fuel the start of an aggressive reaction selling phase any time between now and 23rd July for 27 or 54 trading days - putting the Rand bulls into a bit of fright again.
However, until there are new factors to change the medium- and long- term interest rate and Rand outlook, the evidence is that our readers need to look for shares that will do well with a stronger Rand and a lower interest rate environment, using a phase of Rand selling ( Rand weaker) to find the buying dips on sectors that like both Rand strength and prospects of lower interest rates. I will call those sector groups "Rand beneficiaries". Those that do well on a weaker Rand, I call "Rand hedges".
For Rand beneficiaries, investors also need to look for the right levels and timing. International markets are vulnerable and if they sell hard -- as I expect in this Q3 -- it would also impact our market - whether in a dip or a hard sell-off. Either way, it is probably a good idea for JSE investors to position for 30%- 50% cash depending on your strategy and risk profile; tightening parameters to take profits/protect capital if you' re in the market. With cash, the dips or dumps in Rand beneficiaries will offer better buying opportunities after any sell-off starting on vulnerable European and US markets. A phase of Rand selling for a month or two, could set up short- term buys on Rand hedges ( e.g. golds and other resources) or selling opportunities to those who have ridden Rand hedges down in the last year or so.
SA's problem is that global geopolitical, market or currency shocks -- often result in a rush out of SA and other developing markets or into selling the Rand for a while; new investment is then also put on hold. Only this morning I heard that the Turkish Lire and the Rand are the two prime "overbought" candidates for a selloff according to Merrill Lynch.
Notice the JSE Overall Index has been below its 200 day moving average for the last three weeks and the FTSE 100 that has been trading for more than a week below its 200 day average, warning of potential to turn into a bear market. Global markets are assessing the weaker trend of the US$ and the accelerating up-trend of the oil price (also in Euro terms) -- and they are calculating the burdens to growth that these dynamics imply for the global economy.
Risks of a down phase for world stock markets are increasing. The biggest risks for global markets are the domino effect from Wall Street and a weakening US$, fuelled by a continuing high oil price, keeping pressure on the record US trade deficit - last I read in July's "The Economist" -- at $48 bn and little being done to import less export more.
The US cannot hike interest rates too fast - or the whole asset pricing structure becomes at more risk of collapse. Bubble property prices after years of stimulatory low interest rates, are sensitive to interest rate hikes or to confidence shocks however they happen; US Treasury bonds kept high in the last few years by Asia struggling to beat recession and anxious not to have their own currencies appreciate; Wall Street priced on increasing growth expectations; national and private debt high. Price cracks in all or any of these asset or liability classes would impact the rest and domino on to the rest of the world.
I do think though, the JSE will be one of the most resilient markets - and among the quickest to recover after a dump. We also have the incredible advantage that if the Rand weakens - many of the JSE exporter companies ( "Rand hedges") begin to discount higher earnings and share prices tend to go up - depending on the scale of sell-off internationally. (Yet when a market crashes, JSE investors are often less interested in earnings for a while -- than the need to protect capital).
I cannot really say if the JSE will fall less than others - but am pretty sure that the right strategy is not to be adding to buys now - rather to be looking for the best buys lower down, once a new base has established. Risks are also seasonally high -- and there are additional warnings from the two- year and three month cycles which may recently have topped.
Yes, yebo, ja, yeah... we have all heard the warnings about global markets for years -- yet markets and asset prices have done fine. Why worry? Isn't the US astute and powerful enough to successfully maneuver its way out of the mess?
Could be - but they are not going to be able or willing to be the mighty financial and military rescuers that they have been for sixty years. Increasingly the US is already going protectionist again, another pressure on its economy and others. It is not taking on the debt and trade deficit problems aggressively enough -- to the contrary, all that is aggressive is their spending.
" The End of Cheap Oil " - see the June National Geographic - is also a huge structural problem for the US both on inflation and for growth. No immediate solutions are in sight. Bottom line, "friendly country" oil reserves after decades of increasing consumption are running out. The cost of developing and extracting oil is often at uneconomic levels. Production peaked in 1970. Consumption has increased since then and has not peaked.
Meanwhile sunny SA is almost immune to the rest of the worlds' problems, judging by fixed investment inflows and the property boom. Not so fast! Our biggest pressures have always come from outside and nothing has changed. Recession worldwide has been the economic hurdle since 2001 and arguably since 1998. Although it looks like the recession war is being won, the risks of reverting to slower growth and deeper recession are still precarious. Have a look at the July Economist and July Newsweek, especially at the excellent article in Newsweek on US property prices starting to come under pressure as a result of the fallout that will spread from unavoidably higher US interest rates.
In bullish commodity markets that can last several years (e.g. a nine year cycle or more from 1999), usually driven by global inflationary pressures as is developing again now -- some investment money moves out of investment instruments, away from inflated property price zones -- into commodity producer countries and companies offering growth. Even if perceived risks are high. See what is happening in Russia and South Africa. Australian and Canadian risks are not that high - but look how these other resource producers have also boomed in recent years.
There are also huge regions which are slowly lessening their dependence on the US and European consumer -- who after some short- term pain will take over as growth leaders from the West. The Middle East, China, India, Japan - are becoming stronger customers for South Africa's mining and non-mining exports.
Back to the question what should the JSE investor to do. I suggest one reduces dependence on opinions about the future, opinions that may have to turn on their head overnight in the volatile environment of today. Investors can act on what they see i.e. the major trend on interest rates and the Rand are in place - now. JSE trend momentum on a three month view is vulnerable, in fact negative. We have to invest in both value and market timing - not yet the days of blissful buy- and- hold like in the happy 80's to 1998. Since 1998 we have been in a predominantly ranging, volatile and sideways market timing environment in which value is also important to catch the 30 %+ pushes. Stock and sector picking has been vital and continues to be so.
Answer - look for Value ( buy on dips or dumps where rational expectations of earnings confirm) and look for Trend to be on your side. Once in, keep cash at the ready for dips and make cash if momentum or value factors deteriorate. Once in the market -- look to stay on the right side of the three month trend. That reduces risk of being caught in lengthy or deep bear and stagnant markets -- and also increases the odds of buying low when the markets are down or in dips.
All easier said than done - but I will do my best to comment to assist.
"The Rand, the Rand, the Rand Gold price..." wail gold believers. One email I received asked - is there any hope .... won't the Rand only head stronger from here? For me, that is one of the best indicators that a phase of Rand weakness for a month or two is imminent.
The " serious" golds one wants to be in - Harmony, Goldfields, Randgold, Western Areas, Anglogold in order of preference - are showing interesting signs of base- building underway as $Gold trends strongly above the $392 key level I have so often talked about. Wait though - the buy signals on shares will be loud when they come.
Fundamentals ( and long- term technicals) could hardly be better for the $Gold price. As soon as sunny SA decides the Rand has had its shine for a while, and the RGold price pushes e.g. towards or through the key R2550 point, buyers will pile into gold shares now at usefully low levels relative to May 2002.
Also notice the supportive two year cycle. The three month cycle calls either now mid July or early September for shares to start pushing higher as well. If the RGold price starts running, we will yell buy signals. Holders who have stayed with declining prices can stay with golds unless the R2430 support fails on weekly close, now at R2451. Also watch the JSE All Gold Index - if support at 1625 fails - counts warn of scope for even better "value" at 1470 or 1325. Technical traders would get enthusiastic to buy with evidence to suggest a sustained break of 1700.
All the complaining and gnashing of teeth about cutbacks on production and retrenchments and lower earnings on the mines, because of the strong Rand, ignores that these are long- term bullish supply demand factors for golds. Foreign investors are already negotiating to extend mines or use unutilised mineral rights. Gold demand has since 1996 outstripped supply. Efforts by the global interests to manipulate and control the gold price only work while the crowd is acting rationally and believing in the US$. When the US$ is dumped will be when we see gaps of $25+ on the gold price as in the 70's when inflation fears escalated.
Louder signals of a run underway will be when $411 breaks and every US$ towards and above $430. Whatever the trigger - even something as simple as a critical mass "100th monkey" deciding one day to disinvest from US assets - watch the $ Gold price head to $475 and the above $500 area that I called at the beginning of the year. And on that scenario - I would guess the Rand has to do a lot of work in the late 5.00's and even mid 6.00's, before probing the 4.00's. Enough work e.g. above 6.00 to support the RGold price for an investable run.
HugoCapital.com is pleased to remind you about the MONTHLY CAPITAL CLUB meeting on Monday 19th July, 2004. The topics will cover "Creating a Long- term and Short -term Financial Strategy using good products" (from leading financial strategists). " Using Contracts for Difference and Active Strategy on Global Markets from your Computer " (Declan O'Brien). GT247 are offering a prize of a R1000 credit to the account of any attendee who best predicts the Dow trading level at the end of the session - and will be showing live trades of the Dow during the session. They are also offering a further R5000 credit to the best traded account in the 10 days following the meeting. A 10- year old Cape- based property investment group with a well- established commercial property- holding portfolio offering a yield of 12.37% and conservatively valued -- is offering shares to the right profile of private investor -- and will introduce its portfolio. Victor Hugo of HugoCapital.com - asset manager and independent market strategist - will talk briefly on "Market Strategy " using graphs to illustrate.
Please book for the 19th July presentation - fee R70.00. ( www.HugoCapital.com/mcc ). Registration 17h45 for 18h00 on 19th July at FNB Management Centre, Grayston Drive, Sandton. Book Here
14 July 2004
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