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Kanaan Asset Managers, June 2014
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Kanaan Asset Managers

June 2014

Expect volatility during the second half of 2014

With the prospect of further rating downgrades, it is difficult to find a good news story about the South African economy.

I would hate to sound like a panic monger, but in this environment, unless there is a radical departure from the countries current growth trajectory, we can expect more downgrades in future.

The Allshare Index has roared to a successive new highs over the past months, but as a measure of the wellbeing of the economy, it is becoming increasingly misleading.

If you look closer the recent gains have been overwhelmingly lead by a handful of high cap Rand hedge companies, which traditionally perform well with a weak Rand. A weaker Rand is a benefit, not hindrance. Under current conditions, any stock that has a measure of protection against a weak Rand is thriving.

So a roaring stock market is in this case not a positive indicator of the underlying health of our economy. If anything it is a jest that the market is plying into these Rand hedges largely because it expects the worst and investors are seeking a hedging mechanism.

Flows brought in by tracker funds should remain even after the ratings downgrade. Much of the money that rushed into out bond market by first world governments in 2012, will stay put. Although he did not quite convince me, Nedbank strategic research head, Mohammed Nala, believes that this might give us a 2 year window to get our house in order.

Thus the taps pouring the easy money that has been driving foreign flows into South Africa won’t be turned off soon. Off course, all of this is premised on the fact that we retain our investment grade status. If we lose that, all bets are off!

Andre Delport

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