Only a few days to go and that was the year that was. The weather outside on the Western Cape coast is balmy but the year of 2015 was anything but. Unpredictable in large measure with any number of surprises, not always that pleasant, but interesting and occasionally entertaining nevertheless.
My sources in the US tell me that soothsayers at investment banks are surreptitiously retraining to become dentists as the near-certainty of predicting the need for root canal surgery at some point beats the hit and miss of crystal ball gazing on politics and economics.
In this benighted part of the world we have a president playing Russian roulette with the national balance sheet. But things aren’t too bad. After all, we are part of that parallel universe of nations, also called the UN, in which anything otherworldly goes.
Even Chinese President Xi Jinping enjoyed a lavish state visit to Great Britain. There was supine, syrupy solicitude all round. This is a big, important, influential country with an international reserve currency, just like the Yuan wants to be. Britain is not Zimbabwe. Only a few decades back the Brits were sending gunboats up the Yangtze river.
On the topic of China, the Shanghai Stock Exchange Composite went from an index value of just under 3000 to a peak of over 5000 in a few months and then all the way down. Unsophisticated casino behaviour maybe but heart stopping when growth expectations are waning, asset bubbles a possibility and on top of it the Yuan is being stealthily devalued.
Then we have Trump in the US, trumping pollsters such is his surging popularity as a Republican presidential nominee. And he garners such attention that he hardly spends any campaigning money, much to the irritation of opponents.
Staying in America, the Federal Reserve raised interest rates for the first rise since 2006. This has given global markets a touch of certainty for the foreseeable future. The new target for the federal funds rate is up 0,25% to a range of 0,25% to 0,50% and suggests that the rate upcycle could be slow and measured.
Over in the EU, the mood is a trifle grumpy. Volkswagen is bunkered after its BP-style Macondo moment, with possibly similar financial implications. The Germans spent much of the first part of the last century causing grief. Then they persuaded company sales reps to trade in a Ford Cortina for a BMW 3-series. All was well for a while. Now they are so collectively nice, by inviting itinerant strangers in by the million, that they are part and parcel of another form of grief in an already shaky Europe. Perhaps this is a crafty plot to sell more BMW cars.
Which brings me back to my old adage, the only certainty about forecasting is that you’ll be wrong. Which is why scenarios are a better bet, what if type stuff.
From a business point of view, commodities were the worst place to be in 2015. The Thomson Reuters/CoreCommodity CRB Commodity Index is down 23% in dollar terms.
A shrewd commodity trader like Glencore finds it difficult to read the commodity market but it has in any event battened down for lower for longer, a growing consensus view.
On the topic of consensus, history teaches us that as a consensus on an outcome takes hold that is possibly the time the outcome will end up being different anyway. My sense is that the commodity bottom is not far off.
Almost any commodity stock you care to name was clouted this past year. Some, like Glencore, will probably remain standing to prosper another day. Others, possibly Anglo American, will be a shade of what they once were and subject to renewed merger and acquisition interest when the cycle turns. Kumba has had to revisit its strategy for the third time this past year and is no longer the cash dispensing ATM for Anglo that it was.
And where commodities go so too, give or take, does the rand exchange rate. The weaker rand predominantly mirrors the decline in commodities across the basket and only ended the year slightly weaker than would be suggested by commodity price developments because of heightened political risk. Hopefully, we can claw back some lost credibility.
A year back I analysed oil price trends and varying scenarios, including the political and fiscal dynamics associated with OPEC and Russia. Brent crude at that time was $64/bbl, down from $110/bbl six months previously. The rand had averaged R10,90 to the US dollar for the six month period since June.
I wrote that variable costs in the short term are well below lifecycle costs and in the immediate future it was difficult to see production being cut, with US production growth only reversing if pricing halved to around $30. OPEC, Russia and others kept pumping oil.
Here we are today with WTI and Brent both in the region of $37/bbl. And the rand is at R15,25 to the US dollar.
Much the same supply and demand dynamics have played out across the commodity complex and will continue to play out in the early part of 2016.
A year ago, iron ore was a shade under $70/ton for 62%/Fe. Iron ore has almost halved and currently tentatively hovering at $40/ton. Molybdenum oxide, an important hardener in steel, halved in price this year too.
But even the S&P 500 made less than 1% in capital gain and 2% including dividends. The JSE is up about 8% with dividends so essentially flat lining and disguising the fact that the rand has gone from R11,55 to R15,25 to the dollar. This is a depreciation of around 25% or, put another way, the dollar costs 32% more.
The best long position in liquid tradable stocks was arguably Naspers, up 42% in rand and a currency hedge if ever there was.
Of the other liquid stocks, retail was by and large a deflating story with erstwhile favourites Mr Price, Massmart and even Shoprite decidedly soggy and automotive-facing Imperial especially hard hit. But my bullish call on Pick n Pay came in nicely to record 27% growth before dividends.
Speaking of liquid, investors have slaked their thirst on a possible merger between SABMiller and Anheuser-Busch InBev with SAB stock up 53% in rand and 22% in sterling.
To give you a sense of the combined size, net of divestitures, if the merger goes ahead revenue combined would be $63 billion, profit from operations $20 billion and profit after tax $13 billion, of which $2 billion is attributable to minorities. Total assets are $279 billion with attributable equity at $88 billion. Gross debt is $131 billion, including $67 billion in financing adjustments to fund the deal. Whilst joint finance costs go up due to debt taken, the pro forma interest cover ratio is reasonable. Financially, the deal appears doable.
Even better news to end the year was the announcement that AB Inbev would add to investor options for next year, independent of the SAB deal. AB Inbev will have a fast track listing for mid-January and as a domestic listing categorisation it offers yet another international diversification stock for South African investors.
So, thanks to the wonders of financial markets, the beer industry gives something for teetotallers to enjoy too.
Bottoms up.
Mark N Ingham
