JOHANNESBURG – Investment guru Warren Buffett says predictions tell you more about the forecaster than about the future.
No one knows what the future holds – investment professionals make educated estimates or take stabs in the dark. Yet, in the world of finance, it is almost impossible to ignore predictions. The secret then, is probably to see predictions for what they are, and not to bet the farm on the rand falling to R20 to the dollar or recovering to R12.50.
Speaking at the JSE’s Power Hour, Simon Brown, founder of JustOneLap, said in truth, investors are also affected by “recency bias” and assume the status quo will continue.
But while some trends change slower than others, things do change. The one positive about recency bias is that things tend to change slower in markets than people think, he said.
While he expects a lot of the current trends in the South African market to continue next year, he also anticipates certain shifts.
Brown said over the last 15 years, the rand experienced a major blowout against the dollar in 2001 and weakened fairly significantly in 2008, but recovered each time.
With the rand trading at R14.61 at the time of writing, the question is whether history will repeat itself?
Brown said the currency’s recent demise was not a blowout, but rather a gradual collapse, which started in the third quarter of 2011.
“My sense is overdone. I think it is going to start to come back. I think it is going to improve. Are we going to get to R12.50 in 2016? That is fairly ambitious in a prediction, but I do think that we are going to see a better rand.”
But the risk is twofold.
Brown said he may just be proven wrong or it could take time for the currency to claw back some of its losses.
But for the rand to make a comeback will require money flowing into the country and at this point it is hard to see a lot of money entering South Africa.
Brown said there is not a lot to be optimistic about, except that the market will at some point become more attractive.
However, if South Africa’s credit rating is downgraded to junk (Fitch lowered its rating to one notch above junk status on Friday, with Standard & Poor’s revising the country’s outlook to negative), all bets are off, he said.
Some asset managers are not allowed to hold junk bonds and will be forced sellers of the country’s bonds if it is downgraded, thus moving money out of the country.
“That will further weaken our currency.”
The really bad news is behind the country and the damage is done, Brown said.
It looks like there is light at the end of the tunnel and the company’s new CEO Brian Molefe seems to be doing a fairly decent job.
The mining and manufacturing sectors’ woes have led to a meaningful decline in the demand for electricity. This has given Eskom breathing room and consumers have not had to live with the significant load shedding they previously expected.
However, for global manufacturers stable electricity supply is non-negotiable, and potential foreign direct investors will have noticed.
Brown said the drought would have “massive implications” in 2016.
In the interim, meat prices are coming down because farmers are slaughtering a lot of their animals, which has led to a glut of meat coming onto the market. The price of maize – which is used as an input in various foodstuffs – has also risen sharply.
But when it does start to rain, it will take time for land and herds to recover.
Brown expects that food producers will face an uphill battle as a result.
Costs will increase and the margins of companies like Pioneer Foods and Tiger Brands will be squeezed, as they will not be able to pass increases on to consumers in its entirety.
While retailers are arguably in a somewhat better position to contain costs than food producers, pressure is also expected to start building in this sector.
Brown said while it is going to be “exceedingly tough” for food producers, it will also be a “very tough” time for retailers.
His favourite retail stocks are Woolworths, which is less susceptible to margin pressure due to the market segment it serves, and Shoprite.
Below R140 a share, Shoprite is attractive, but a word of caution is advised because the share price is not expected to soar next year. However, on a forward dividend yield of 3% and a forward price-earnings ratio of 16 times, its valuation is much more attractive than three years ago when its forward PE was 34 times.
“But 2016 is not going to be a boom year for any of the food retailers.”
With regard to commodities, he expects “more of the same”.
The problem with commodities is supply and demand, Brown said.
In the lead up to about 2010, China was industrialising at a rate that hadn’t been experienced for several decades, which led to a significant demand for commodities.
Brown said the massive increase in demand saw the price of commodities soar and suppliers got on board to take advantage of it.
But China is morphing into a consumer-led economy, and the demand for commodities has collapsed.
Brown said the demand experienced during the super-cycle won’t be seen in the near future and the oversupply of commodities remains intact.
For the supply situation to normalise, major players will have to go bust, he said.
South Africa Inc.
While Brown does not expect the country to enter a recession in 2016, an economic growth expectation of 2% is probably optimistic.
He expects the FTSE/JSE Africa Top40 index to be flat “at best” next year, but returns will probably be in negative single digit territory.
A correction below 40 000 points would provide a buying opportunity, he said.