Sitting on a Gold Mine

05/18/2009 6:58 am EST

Focus: GLOBAL

Prieur du Plessis

Author, Investment Postcards from Cape Town

The South African stock market is poised to lead the next leg of the bull run, says Dr. Prieur du Plessis, the Cape Town-based portfolio manager and popular blogger.

Q. Could you summarize your investment philosophy?

My investment philosophy is eclectic in that it does not fit into any one of the traditional boxes of fundamental, technical, value, growth, and contrarian, but rather comprises aspects of all these categories. Above all, it is big-picture-oriented and rooted in solid research. 

Q. On your blog, you've suggested that the global rally has strong underpinnings, but also pointed out that seasonal factors are turning less favorable. Which do you consider the more important factor?

A: Evidence from previous recessions shows that equity prices historically seldom weakened significantly in the summer of the first year of recovery-in fact, prices usually moved higher.

From a fundamental perspective, one of the main driving factors in the US and global economy in coming quarters will be consumer and business confidence as it is inextricably tied to money-supply velocity and economic growth.

Despite the inflationary consequences, the Federal Reserve's multi-trillion-dollar monetary expansion plans will lead to a significant increase in money-supply growth in the coming months, which in turn will ease bank credit not only to the corporate sector but also to households.

However, I expect the return to positive economic growth, possibly in the fourth quarter of this year, to be weak as business investment will continue to be under pressure. The thawing of credit markets and the return of confidence augur well for the longer-term outlook for equities.

Q. Which global stock markets seem the most attractive? And the least?

A. Emerging-market equities and BRIC countries in particular offer the brightest prospects. Although the MSCI Emerging Markets Index is up by [over 50%] from its lows in November last year versus [less than 20%] for the MSCI World Index, emerging-market equities are still behind mature markets when measured from the October 2007 bull market highs.

Growth prospects in emerging economies are significantly better than those of mature economies-in fact, the world is relying on China to help pull the global economy out of the current malaise.

The least attractive are the European equity markets, mainly as a result of significant outperformance over the past year as the Eurozone was hurt less by the global trade impasse.

Q. Could you discuss the South African market's performance and prospects?

A. The South African FTSE/JSE All Share Index (+50%) has outperformed the MSCI World Index (+19%) in US dollar terms since the November 20th lows. South Africa underperformed in local currency terms, but this can be ascribed to a surge in the value of the rand [hurting] South African resources and other rand-sensitive stocks.

The Johannesburg Stock Exchange (JSE) would have fared even better if not for the political uncertainty in the run-up to the April elections and the South African Reserve Bank's (SARB) hawkishness. With commodities set to gain momentum in the coming months and expected further cuts in the SARB's repo rate, the stage is set for South African equities to outperform.  

Q. Should investors be worried about new president Jacob Zuma despite his efforts to reassure them?

A. No, it is expected that monetary and fiscal policies will remain sound. Zuma and the African National Congress's (ANC) top team are acutely aware of the impact of foreign capital on an economy's well-being.

It is particularly comforting that Trevor Manuel, the trusted long-time minister of finance, has been retained in a senior position. His successor, Pravin Gordon, previously headed up the SA Revenue Services and is widely respected. Although the new cabinet line-up includes concessions to the left, Manuel is expected to keep a firm grip on economic policy.

Q. What are your top current investment picks, whether globally or within South Africa?

I recommend investors play the "reflation" trade, including the ETFs listed below. However, stock markets are experiencing a correction at the moment and these instruments should only be bought at lower levels.

  • China: iShares FTSE/Xinhua China 25 Index (NYSEArca: FXI)
  • Brazil: iShares MSCI Brazil Index (NYSEArca: EWZ)
  • India: iPath MSCI India Total Return Index ETN (NYSEArca: INP)
  • BRICs: Claymore/BNE BRIC (NYSEArca: EEB)
  • Materials: iShares S&P Global Materials Sector (NYSEArca: MXI)
  • Natural Gas: United States Natural Gas (NYSEArca: UNG)
  • Gold: SPDR Gold Trust (NYSEArca: GLD) and Market Vectors Gold Miners (NYSEArca: GDX)
  • High-yield corporate bonds: iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG)
  • T.I.P.S.: iShares Barclays TIPS Bond Fund (NYSEArca: TIP)

In addition, I favor cyclical South African equities such as the construction and engineering group Murray & Roberts (Johannesburg: MUR) and fashion retailer Foschini (Johannesburg: FOS).

Investors wishing to invest more broadly in Africa can do this through one of the dedicated regional funds such as the Investec Africa Fund and the Imara African Opportunities Fund.

Q. Does South Africa deserve its own asset allocation for overseas investors, as distinct from a generic allocation to emerging markets?

A. Yes, South Africa deserves its own asset allocation as a result of its dominant role in many resources markets, the fact that many local companies are world leaders in their respective fields, and the country's unique positioning as gateway to the African continent.

The iShares MSCI South Africa Index Fund (NYSEArca: EZA) is US dollar-denominated. For investors wishing to invest directly in South Africa, the NewFunds eRAFIR Overall SA Index ETF Portfolio, a JSE-listed instrument that is rand-denominated, offers an interesting alternative.

Q. Thank you.

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