MitonOptimal South Africa Quarterly Market Report (Q4, 2015)

We have long been forecasting that capital market volatility would rise, given a whole host of concerns and, in 2016, we have seen these concerns manifested in the sharp drawdowns across global equity markets. To remind our readers, we have long been warning about slowing global economic growth, especially Emerging Markets (EM), tightening global liquidity – led by the US Federal Reserve (the Fed) – and unattractive valuations on global and local equity prices. Despite being concerned about these risks, we have been surprised by the voracity with which markets have reacted so far this year.

At the time of writing, global and local stock markets have corrected by more than 10% in the first 13 working days of the year. Almost at a pace of 1% per day. Many global stock markets have entered bear market territory (more than 20% loss of value from the top of the cycle) in US Dollar terms. The JSE Top 40 Equity Index has lost more than 41% of its value in US Dollar terms, from its 25 July 2014 high and 15% in Rand terms since 5 November 2015.

Whilst it is hard to see the positives in this current environment, we are able to report that our rigorous risk management process and diversification philosophy has managed to protect our investors, from a large part of this equity market correction to date. Global investor sentiment has deteriorated quickly this year and from a technical perspective, it may even get worse in the short term, as major support levels have been breached. This normally leads to more negative reaction by algorithm traders and investors who panic due to the market volatility and media attention.

But the really good news is that after years of struggling to find good value for our investors, quality assets are now a lot cheaper than any time over the past 3 years! Fortune favours the brave and in the midst of this current sell-off, we have identified some very exciting opportunities for long-term investors.

Why the Volatility in Global and Local Markets?

Let’s break it down and deal with the negatives and then extrapolate the potential reality…