The experts' guide to riding out 2016

Shaun Murison, market analyst at IG. (Picture supplied.)
Shaun Murison, market analyst at IG. (Picture supplied.)

Well 2016 has been a wild ride so far! The year started off with most shorter-term traders thinking that the world was busy ending, followed by longer-term investors feeling rather smug about their patience and resilience as equity markets rebounded and carried the more bearish shorter-term traders out on stretchers. 

For the most part though, we have survived the first half of the year rather well. Despite the tremendous turmoil, the JSE All Share Index has managed to put in a marginal amount of growth with a year-to-date return of 2.53% at the time of writing. Which sounds fantastic given the backdrop of the ailing world economy, fears around China, interest rates actually normalising and the dreaded Brexit.

At the time of writing, the JSE has returned only 3.57% over the past 12 months, which means we’ve essentially had another 12-month stretch of hardly any growth in rand terms. 

Some of the more experienced hands in the local financial markets have described the current prevailing market conditions as “as difficult to navigate” as they were back in 2001 and 1984. Tapping into their experience from previous periods of market turmoil, the main question for investors and traders is: where can we turn if we are looking for relatively safe investment returns going into the second half of the year?

In order to get some guidance with this stumper, finweek has put together seven questions, partly inspired by a May article published in the Financial Times, to help steer readers’ decisions for the remainder of the year: 

What was all the fuss about Brexit?

The best explanation probably comes from Daniel Spoormaker, a trader at Bayhill Capital in Johannesburg, who explains that the market got incredibly hyped up about the terrible and devastating consequences should Britain decide to leave the EU. This, he says, was because of a seemingly never-ending stream of experts who would pontificate for hours about what would happen should the dreaded Brexit take place. 

Investors, traders and even pensioners were so hyped up about the devastating impact Brexit would have on financial markets that when, against the better judgment of so many commentators, the Brexit vote actually won, a self-fulfilling prophesy played out and the market sold off. People had been told again and again that the market would sell off and the world would end if Brexit took place, and when it did, people reacted to what they had been told would happen and thus the market sold off very sharply for a few days. 

As we have seen though, the impact of Brexit on world financial markets might have been overstated as after the initial shock was over, market participants realised that the world had not come to an end as was feared would happen, and rebounded rather quickly.
The Brexit story is not yet completely told though. The people have decided, sure. But what now? 

Shaun Murison, senior market analyst at IG South Africa, explains: “Brexit is about uncertainty. Uncertainty breeds volatility and I think we have a lot more of that to come into the future, especially when the actual logistics of the breakup get negotiated.” 

The risk to global markets that remains present with regard to Brexit is that the rest of the EU disintegrates. “The EU has a responsibility of making it known that being a part of the EU is beneficial to European economies to avert the prospect of contagion and other members following the same path,” Murison says.

Which three assets would you back for the remainder of the year?

Founder of Just One Lap Simon Brown says that even though he hates the stuff, momentum is driving gold higher, thus owning some is not a bad idea. He has similar feelings toward gold mining stocks, but again the market momentum in this sector is up so he does own some. Interestingly, Brown also notes that one should always own pumpkin seeds... in case of an apocalyptic-type scenario, we suppose? 

Investor Karin Richards believes the assets to back for the rest of the year are gold, silver and the US dollar. She elaborates and specifies Gold Fields, Kumba Iron Ore and Aspen as particular stocks to gain exposure to.

Spoormaker is playing it a little safer, or perhaps staying true to his shorter-term outlook as a trader and not taking views based on time horizons, but rather specific data points and events. For now, though, he says that he is backing some select local shares and a short gold/long platinum pair trade. 

So even though there is some disagreement about exactly where to put your money for the rest of the year, the overriding theme is one of resources and defensive stocks.

I agree with Richards and am also of the opinion that the previous darlings of the market are in for a difficult time. And even though it seems like the risk play, I should be investing in resources and oil-orientated stocks on the local bourse. I would probably add that also backing pharmaceuticals and telecommunication stocks would make for a good portfolio with elements of defensiveness and risk in a market that is very much unpredictable. 

With the benefit of hindsight, which trade do you wish you had been in since the beginning of the year? 

Spoormaker simply quips “long Clicks”, while Murison wishes he was short the pound and yen. (At the time of writing, Clicks has returned nearly 41% to shareholders since the start of 2016.)

Richards and analyst AJ Snyman both wish they had been long gold miners. Brown did manage to get exposure to gold miners, but says he wishes he was short the pound or UK listed property. “In hindsight it was a no-brainer, but nobody bet Brexit would happen,” Brown adds.

As we can see from their responses, the market has reversed some of the long- standing trends that were in place over the past few years. Gold miners and resource counters finally appear to have turned the corner, industrials and financials have taken a downturn and volatility has steadily been on the rise.

This has taken many an investor and trader by surprise and has been causing a great deal of pain for many market participants. Recall the conversation about the most difficult market conditions since the tumultuous times of 2001 and 1984?

This is a shortened version of the cover story that originally appeared in the 21 July edition of finweekBuy and download the magazine here.

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