Nedbank Global Equity Feeder comment - Sep 06 - Fund Manager Comment14 Nov 2006
The portfolio is currently 97% invested in the Marathon Asset Management Global Equity Fund, with the balance in cash. It was a good quarter all-round for both equities and bonds, especially in developed markets.
Much of the debate at the moment is focused on whether the Fed has paused in the current cycle and when, and by how much the rate will be cut in the future. Most believe that the first cut will occur in the first or second quarter of next year.
The question is: How financial markets are likely to react given that a turn is imminent in the monetary policy of the US?
During periods of recession or extreme slowdown, the yield curve will either flatten appreciably or invert. Long rates are lower than short rates as the bond market discounts zero or negative pricing pressure within the economy. Short rates are eventually lowered to encourage an up-tick in growth and as this occurs, long rates rise as the bond market anticipates an increase in economic activity and a rise in inflationary pressure. The yield curve then normalises and steepens as growth starts to pick up. All along, corporate earnings track economic activity.
- The yield curve is forecasting a substantial slowdown in economic growth over the next 12 months. We don't anticipate recession though, as most of the structural pluses remain in place - low inflation, globalisation, technological developments, the BRICs (Brazil, Russia, India and China) and low volatility growth;
- Corporate earnings growth will slow as the consumer cuts back. This is normally negative for equities.
On the assumption that the US interest rate cycle has indeed peaked, what does the future hold?
The historical average period before interest rates are cut has been about seven months. Should the average hold, the Fed will cut in February2007. The period between the last hike and first cut is traditionally a weak one for shares. While previous cycles have seen severe equity market corrections, some of them were presaged by extreme events - 1974 was distorted by the oil crisis; 1981 by concerted central bank intervention aimed at curbing inflation and 2000 by the need to redress the wildly inflated tech bubble. We believe that we are in a period similar to the 1995slowdown. The rate cut in July1995 saw the market jumping by 13% in the following six months as investors were placated by prospects of a soft landing and no recession. The key risk to this scenario being repeated in2006/2007 is that the housing collapse is more dire than expected and that the consumer will react accordingly.
Nedbank Global Equity Feeder comment - Jun 06 - Fund Manager Comment11 Sep 2006
The portfolio is currently 94% invested in the Marathon Asset Management Global Equity Fund, with the balance in cash. There are many descriptors of the events of the past quarter. The most socially acceptable words are "sjoe" and "eish". While neither is founded on any financial theorem or rating's matrix, they more than adequately express most investors' feelings toward the recent volatility of financial market.
Things went awry for equity and currency markets in the second week of May, and the collective mindset swung around. There is no one single event that can be identified as having broken the camel's back. Rather, it has been an accumulation of excesses over time that led to the crack: strong world growth rates; rampant commodities, including that party-pooper of note: the oil price; increased correlation between assets that would normally be uncorrelated at these times; already highly rated shares producing even greater winning returns; gradually rising inflation rates; central bank rhetoric being translated into monetary tightening. The seeds of the recent downturn were already sowed in October of last year, when world bond markets started to turn weaker. Equity markets only latched on six months later.
The US$ reassumed a semblance of safe haven status and the riskier assets were punished. While one can debate the likelihood of a stronger dollar going forward, our view is that it is the haven of choice during times of uncertainty and that we aren't out of the woods yet. Higher rates will provide some support, although we know that the US's major trading partners are in similar tightening mode. We would bet, however, on continuation of the relative outperformance of the developed market universe for the rest of 2006. The leading question is whether the short-term jitters that we have just experienced will have done anything to upset the macro environment. We would argue that it has.
The cost of doing business has just gone up. For countries like Turkey and South Africa, the speed of the monetary response to the unforeseen currency fallout would not have been factored into forecasts. So, there will be some regions where growth prospects will revised downwards. At risk would be the perception that corporate profitability can be maintained or even bettered. Various metrics such as ROE's and price-to-book ratios are at all time highs. These will mean revert the cycle slows and as share prices fall. Guidance will be given by the direction of earnings revisions and we lean towards forecasts being cut back.
Nedbank Global Equity Feeder comment - Mar 06 - Fund Manager Comment20 Jun 2006
The portfolio is currently 93% invested in the Marathon Asset Management Global Equity Fund, with the balance in cash. The fund outperformed the benchmark MSCI return of 6.7% substantially over the quarter.
The past quarter was great for international equities. The MSCI World Index rose by 6.1% in US$-terms. Markets that outperformed were again predominantly from the emerging economies. The MSCI Emerging Markets Index rose by 11.5%. Markets from the Developed regions, lagged. The USA rose by 3.7%, Germany by 3.3%, Japan by 2.7% and the UK added 1.4%.
After years of deflation, a huge jump in Japan's core inflation figure occurred in January. Japanese bonds tumbled and dragged other fixed interest markets with it.
Tighter Japanese monetary policy would have a severely negative impact on the yen carry trade, which in turn would lead to the liquidation of long positions in high-yielding currencies and selected commodities.
Driving the inexorable momentum of share price rises is the perception that inflation is under control and for as long as that is the case ,the usual bogeymen of financial markets such as current account and fiscal deficits, consumer debt levels, yield curve inversion as well as market ratings, don't mater.
The roots of this view lie in the perception that 2006 will see a continuation of 2005. 2006 is expected to play out as follows:
o World growth will be slightly slower in the coming year, with lower US performance being offset by a pick up in Europe and Japan;
o The world has a greater deflationary than inflationary bias. Chinese production lies at the heart of this view;
o The US consumer is better placed than is given credit for. Although gearing is a concern, the fact that Joe Citizen remains in positive equity will prevent a consumer collapse;
o US trade imbalances will not be an issue as they will continue to be supported by competitive currency devaluation by the predominantly Asian economies. This US$ support structure will only unravel when inflation kicks up in the Asian economies.
So where could things go wrong? We believe the greatest risk lies with the US consumer. Should he prove to be more resilient than the Fed is happy to tolerate, short rates could rise by more than is expected, which will make the demand for Chinese imports fall. A knock-on effect one merging markets would be inevitable. Furthermore, given the tightening bias in monetary policy virtually worldwide, the abundant liquidity will start dissipating.
Nedbank Global Equity Feeder comment - Dec 05 - Fund Manager Comment24 Jan 2006
The portfolio is currently 97 invested in the Marathon Asset Management Global Equity Fund, with the balance in cash. The fund experienced a strong December and outperformed the benchmark MSCI return of by 1.6%.
The end of 2005 called for champagne (the real stuff) as international equities performed well generally. Those with an overweight to the US however, could only afford to celebrate with a Coke and popcorn as the largest share market in the world continued to be dogged by rising rates and uncertain prospects. By contrast, Emerging Markets continued to boom and herein lies a conundrum.
Some other events that we anticipate for next year are the following:
- World growth is set to moderate as rising rates in several developed economies slow consumption spend. This will impact on corporate revenues. Following on years of rationalisation and restructuring of balance sheets and with company ROE's at significant highs, it is difficult to see how profitability improvements can continue. G5 corporate profits as a percentage of GDP are at an all time high and with GDP set to weaken, so should the former;
- The New World economies (including China and India) are set to continue their strong showing, although momentum will most likely peak. Nevertheless, as the marginal buyers, their influence on commodity prices will remain in place. On balance though, these prices will show greater signs of divergence as the cycle approaches its zenith. Thus, contract iron ore prices are expected to rise between 5% and 15% in 2006, whilst lesser quality coal prices are set to fall. Oil prices are forecast to remain at current levels;
- The US equity market offers more value than it did 3 years ago. Since its peak in March 2002 of 46 times earnings, the PE ratio of the S&P500 has declined to below 19 - an annualised derating of some 25%! The unwind in rating was brought about by the rapid growth in corporate earnings post the write-downs of 2003. Although earnings growth of 16% in 2005 has exceeded expectations of 10% at the beginning of the year, the market is at best valued fairly. Consensus expectations of 12% growth in profit after tax seems optimistic though, in the face of still higher short rates and slower GDP growth;
- When valued in terms of reverse yield gap, US equities still offer better value than long bonds and cash. This is true of most international markets. Thus equities remains the asset class of choice;
- After having outperformed in 2004, mid- and small cap US shares held their own against the performance of their larger peers in 2005. Large caps need a strong $ to outperform. Whilst the Greenback was notably rampant in 2005, the large cap relative performance was poor. Expect some claw-back in 2006.