After completing a strong year in 2011, the fund has started 2012 on a very buoyant note.
Current Fund Structure
The Rezco Value Trend fund is classified in the Domestic Asset Allocation Flexible sector. As at 27 January 2012 the fund was near its maximum allowable exposure to foreign equities and foreign cash holdings which stood at 23%. Local South African government bonds made up 9.5% of the total net asset value while less than 4% was invested in local cash. Local South African equities comprised 63% of the portfolio.
Key Investment Themes for 2012
- Europe: We believe Europe will avoid a major dislocation but it is faced with slow growth and recessionary conditions.
- USA: On current evidence the USA economy is slowly but steadily recovering.
- International Equities: The absence of a meltdown in Europe, together with cheap valuations, the return of growth in the USA and an environment of cheap money should drive positive equity markets for the year as a whole.
- China: This economy is very difficult to forecast but we see reduced growth, though not a hard landing. We are avoiding non-fuel resource exposure as a result.
- South Africa: The direction of South African shares will be dictated largely by the external factors mentioned above. Local shares are relatively expensive but should still beat cash over the year. The rand is expected to strengthen in the coming months as the international appetite for risk returns.
In our market commentary in December last year we stated that the European crisis had two parts. Firstly, there is a budget deficit problem in many of the leading member countries. The second aspect is one of banking liquidity. We felt that the European Central Bank (ECB) would address these two issues with different remedies. The budget deficits and sovereign debt problems would be dealt with by keeping the pressure on governments to cut their deficits. At the same time the ECB would ensure that bond rates did not explode upwards in Italy and Spain by carefully buying their bonds on the open market, but avoiding using the words “Quantitative Easing”. The danger of this stealth approach is that controlled fires can get out of hand at times. The graph below of the Italian 10 year bond shows how rates have improved from the precarious levels of December last year.
The crisis in banking liquidity has been dealt with by supplying almost unlimited three year loans to banks on a wide range of assets as collateral. A significant amount of this money is finding its way into European sovereign debt as banks re-invest to earn a spread.
Both these measures have amounted to stealth quantitative easing or a programme of printing money by the ECB. The graph below shows just how much the ECB’s balance sheet has grown.
The expansion of the ECB’s balance sheet has been similar to that of the Federal Reserve Bank’s (Fed) in the USA. Many commentators have been calling on the ECB to use a “big bazooka” and stand in the gap to fix the crisis. The extent to which they have expanded their balance sheet has essentially amounted to the same thing. They have already pumped close on one trillion dollars into the system. The effect of these measures on the European crisis will ensure that matters resolve without a major dislocation.
Most measures of economic health in the USA show clear signs of a recovery underway. Unemployment is declining, GDP is recovering and the housing bust is slowly healing. We expect the USA economy to continue to improve through the year. The Fed made it clear after their meeting late in January that they will continue with easy monetary policies until the economy recovers.
The scenarios depicted above should ensure that developed market equities make steady progress during 2012. We are in an environment of cheap money which will tend to drive asset prices.
Many commentators are concerned that China faces a hard landing as it deals with excesses that have built up in their economy. The most notable being a housing boom that became extremely speculative. Anecdotal evidence abounds of apartment buildings and in one instance an entire new city standing empty. We believe that the high level of savings within the Chinese economy mitigates against these developments causing a USA type housing bust. The Chinese economy should continue to expand, but could see growth rates closer to 7% instead of 10%. While aggregate demand for commodities may be strong, supply is also growing quickly. Should supply slowly start to overtake demand, many commodities could reset to much lower levels.
Local share are expensive when compared to other emerging markets. This will constrain investment returns during 2012. Equities will however in our opinion, outperform cash or bonds over the course of the year.
Rand-Dollar Exchange Rate
As fears recede of a cataclysmic meltdown in Europe, the carry trade of borrowing in Europe and investing in higher yielding currencies will continue. As can be seen from the graph below, the Rand and the Brazilian Real (indexed to the same scale) tracked each other over the past four years. This would indicate some scope for the rand to strengthen.