After a tough 12 months, Year of the Snake might be better
THERE are 12 creatures represented in the Chinese calendar, with a different animal commemorated each year. In 2012, we celebrated the Year of the Dragon. As we look back over the past 12 months, some of the traits associated with this zodiacal figure ring true. The dragon is known to live by its own rules, is a risk taker and prefers to be alone. This was a year that promised much but often failed to deliver.
One only needs to consider all the recovery talk that emanated from the eurozone and how little in reality was accomplished. As the region’s policymakers try to forge a way forward, Greece could find itself alone after exiting the monetary union in the near future.
We witnessed a global trend of countries revising growth forecasts lower, unemployment remaining stubbornly high and resulting anaemic consumer health. However, the relative value of risk assets versus bonds has been one of the drivers of equity markets. Coupled with companies generally continuing to deliver real earnings growth (despite understandably more cautious outlooks), most global equities indices have posted respectable gains in the year to date.
At the time of writing in the first week of December, the JSE all-share index had posted a gain of 19.75% for the year and reached new highs in the process, with much of that performance attributable to the industrial and financial sectors. This stacks up well against emerging- and developed-market peers. The rand had, however, depreciated by about 15% over the year, which kept the exporters happy but did not help the inflation outlook.
Among notable company achievements for South Africa this year are Richemont being included in the EuroStoxx50, Sasol building a $21bn liquid-to-gas plant in Louisiana, and First National Bank being nominated as one of the most innovative banks in the world.
Next year is the Year of the Snake, but what will it hold? The Chinese zodiac describes the snake as analytical, graceful and having a penchant for the finer things in life. While economic fragility and political gridlock are likely to be a thorn in the market’s side for some time, there are key factors to consider. After a torrid year for the Shanghai Stock Exchange, which saw the Chinese market lose nearly 8% of its value and plumb levels last seen since early 2009, there are signs that the hard landing will not be forthcoming, with the country’s equity market already discounting a far worse outlook than some of the economic data are suggesting.
We have seen purchasing managers’ index numbers for Chinese manufacturing hold above the expansionary 50 level, with a brief dip below in August and September before moving higher. Should the Chinese manufacturers continue to gain traction, we will see the positive effects of this recovery in the world’s second-biggest economy on commodity prices, construction and housing, with stronger global growth.
In addition, should China’s growth remain at about 7.5%, its emerging middle class will continue to gain momentum, urbanise and expand into an even stronger consumer force. The demand for luxury goods remained resilient throughout a tough year, particularly in economies such as China, and the manufacturers of these goods performed handsomely. Should the Year of the Snake show any improvement in economic growth, we should see more of this proclivity for the finer things in life.
In the US, we are on the precipice of the much-vaunted fiscal cliff. Bar any cerebral implosion from the powers that be, a deal should be fleshed out in some shape or form and the markets will go back to what they do best — contemplating the outlook and discounting it to current prices.
Although the general health of the US consumer has continued to disappoint and unemployment showed only a slow improvement, there are some green shoots emerging. Construction and home sales are improving and point to growing demand in that sector. This could boost consumer health as houses tend to be the greatest creator of wealth for private individuals. If we witness the re-emergence of the US consumer, we will see the engine that drives more than 50% of the world’s largest economy start to accelerate.
The competitive commodity markets are going to be key in 2013. Although many mines have seen their margins diminished, value exists in the cyclical counters. With the profitability of some mines marginal at best, the viability of expanding existing production and bringing new assets online is small. The current environment is more conducive to mergers and acquisitions, and additional activity in this sector is possible, as it is more profitable than expansion. But with much of the pessimism surrounding global growth already baked into current commodity prices, the potential for surprise is to the upside.
With the continuing industrialisation of emerging economies, particularly China and India, combined with an awakened US consumer, a potent cocktail for a commodity rebound could be brewing in 2013.
Mzansi, what does the Year of the Snake hold for you? After outperforming most other markets in 2012, we might find this a hard act to follow. With political machinations a constant sideshow, the drain of flaccid leadership and the hordes of unemployed youth, companies will need to stay nimble to generate earnings effectively. Cold, hard analysis of the current environment is warranted, with further cost-cutting measures likely. Should we continue to muddle our way forward, there is a real chance of further monetary loosening as growth continues to falter and competitiveness and productivity wane. A rebound in commodity prices will be a welcome catalyst for buying in our local resource stocks, which had a tough time this year.
Platinum miners, bedevilled by labour unrest and earnings pressure, offer a unique opportunity. The best companies in this sector, such as Anglo American Platinum and Impala Platinum, have worked hard this year to keep margin mines profitable and manage their labour forces effectively. The platinum price stands to benefit in 2013 as consumers, wanting the finer things in life, buy more platinum jewellery and acquire new cars (requiring catalytic converters). The continued supply constraints in the industry should underpin the metal, with higher prices possible.
All that glitter is not gold, but if it is platinum, it just might be better. Have a great 2013.
• Shutte is an equity and derivatives trader at Newstrading.
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