Will the rand continue to stay stable in the current environment? Is it a good idea to up exposure to the euro market index? What are the expectations for the local economy? Andrew Vintcent covers this and more with Ryk van Niekerk in our new market commentator feature. Below is an excerpt of the 30-minute interview. To download the audio in full, click here.
RYK VAN NIEKERK: Welcome to this Market Commentator webinar. This weekly webinar is exclusive to our Moneyweb Insider Gold subscribers. This webinar is where we really analyse what South Africa’s top fund managers think about the market; we try to understand their thinking and expectations, where they see risks and opportunities; and then at a company level which companies do they like and, more importantly, which they dislike. My guest today is Andrew Vintcent. he is a fund manager at ClucasGray Asset Management, and manages a few portfolios there. Previously he has been in the asset management industry at Stanlib, as well as Rand Merchant Bank. Andrew, welcome to the show.
ANDREW VINTCENT: Thanks very much, Ryk.
RYK VAN NIEKERK: Andrew, let’s start with the international markets and then work our way back to South Africa. On Wednesday we saw an increase in the interest rate in the US. It was expected and it seems like we are now really moving into a rising interest-rate cycle. What are your views on this increase and what it means for markets.
ANDREW VINTCENT: We are very encouraged by what’s playing out in global economies right now. The fact that rates are rising in the US is part of a normal economic cycle. We have had a sustained period of central banks fighting deflation with very accommodative monetary policies, and we think the fact that we are entering into a global period of reflation and mildly improving economic growth is very encouraging on a number of fronts. It’s encouraging for corporate earnings.
I think it’s important to stress that nominal GDP growth in the US has been on a structural declining trend now for a number of decades, where you’ve had inflation running at increasingly lower and lower levels and the nominal GDP growth, as a result, has also been running at low levels. So the environment for corporates to generate strong earnings growth in an environment of low nominal GDP growth we think has been very difficult. So any improvement in that macroeconomic environment has to be conducive for companies to be able to generate higher earnings and obviously for equity markets to potentially perform better.
RYK VAN NIEKERK: But we have this interesting situation in the US. We’ve seen this economic turnaround starting under President Obama, and then Trump took over and he made very short-term, almost populist, announcements and promised populist policies that in theory at least should boost the American economy. Currently the markets are at an all-time high in the US. They are very, very strong. Do you expect this momentum to continue and where does it come from? What is the base of this current economic growth that we are seeing there?
ANDREW VINTCENT: I think low interest rates have ultimately done a lot of their job, so bond yields have been running at historically low levels. We’ve never seen bond yields globally at levels this low. And short-term interest rates have also been very low – we touched on that earlier. But the new policies from the Trump administration seem to be an environment which is promoting fiscal stimulus, which is very encouraging. So the jury is still out really as to whether they can afford all these fiscal stimulus measures.
But, be that as it may, right now the market is rising in anticipation of what is likely to become a better economic environment. So whether it’s driven by the arrival of the new president and the new administration, or whether it’s driven by the simple fact that we’re in an economic cycle where we’ve had a sustained period of stagnant, nominal GDP growth, we’re into a natural cycle where things could potentially improve. It’s a debate as to which one it is. But from an equity market point of view there is no doubt that the market has rallied in anticipation of these earnings that are likely to come through.
Equity markets obviously like growth. It’s been an extraordinary rally – the S&P is up 21% in dollars year on year, so it’s been muted a little bit by the fact that our rand has been stronger, but the dollar performance of the S&P has been extraordinary. So we are encouraged by that. But we must caution that the PE multiples that one is now paying for the anticipated growth to come through are reaching levels that are quite elevated. It goes back to the first point I made, you can’t look at these things in isolation. We love to break the market down into one item, but there are so many confluences of events that drive equity markets. I think one of the big themes that has driven the structural rerating we’ve seen over the last ten or 15 years has been the falling of bond yields. The European bond yields have gone negative, US bonds troughed at about 1.4%, 1.5%. That falling bond environment has enabled equity investors to pay higher multiples for the market.
The full interview is available for purchase here.