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April 2018

Dear client,


The global sharemarket correction which started during January 2018 is causing many investors to stress. That is understandable, especially if we take the political uncertainty South Africans have experienced over the past few years into account.


A majority of economists believe that it is only a correction and to panic and to switch your investments in growth funds to the money market or similar funds can cause your investment portfolio great harm. If you want to make a move, do it after the market had a good run, but now is probably the worst time to withdraw money from growth funds. It is rather a good time to invest now.


It is true that the trade tariffs of Trump have undone the recovery efforts in markets since the initial correction lows seven weeks ago. The MSCI World Index, in Dollar terms, is back at October levels.


At this stage it is still a correction in the ongoing Bull market, being -9.4% below the record highs (see on 26 January this year). We believe Trump is more intent on negotiating a better deal for the US than entering a tariff war.


As mentioned previously the overall trade deficit in goods and services with the World Widened by 12% in 2017 to 566 billion, the highest in 9 years. So Trump certainly has the numbers on his side in terms of negotiations.


RMB Morgan Stanley says that the S&P500 Index is now trading at 16 times earnings expected in 12 months, which means the market is still undervalued, as many economists believe that a fair PE or price earnings ratio is 18 times.


It is interesting that the MSCI emerging market index is -7.9% from its late January high, and so is outperforming the developed market, which is very unusual. Usually in times of trouble this index falls further, as currencies also get knocked. This is a healthy sign that the usually more volatile emerging market index is outperforming. So funds continue to flow into emerging markets because of which we are so positive about India. Shares usually rise 20% - 50% above fair value and many economists believe that the expansion is still in the middle stages.


The expansion has support from tax cuts, deregulation, a lower dollar, accelerating productivity and good earnings growth. Moderate inflation is a key ingredient for a healthy economy. Based on history, a recession does not normally occur until inflation moves up sharply and the Fed engineers the downturn.


How long will the present strength of the Rand last?


When should one consider to move funds to offshore funds? Since the US Dollars low of just over $1.25 to the Euro on 25 January 2018, there has been some consolidation in the Dollars down trend or Euro’s up trend over the past two months. The Dollar has weakened to +/- $1.25 to the Euro, but the consolidation of the situation remains intact for now (largely sideways move). A strengthening of the Dollar would have caused the Rand to depreciate, but it seems to us that the Rand will also move sideways for the next few months.


Friendly Greetings


Andre Delport

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