June’s perfect inversion for investors as May’s disasters become winners

The Corion Report, now in its sixth year, is a superb reference tool for the past month’s performance of asset classes. Compiler David Bacher, Corion’s CEO, explains why the big losers in May turned into the hardest runners in June, unpacks the unit trust sector’s winners and losers and shares his thoughts on what lies ahead. He spoke to Alec Hogg of BizNews.

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Excerpts from the interview

David Bacher on June

June was, in many ways, the mirror image of the previous month. Last month, we spoke about how the rands weakness was really the driving element behind our market and it materially and negatively impacted our equity and on markets. And if you remember, we cautioned investors not to panic. We felt that there was indeed value in many local assets. Unfortunately for investors, at Corion that actually turned out to be true during June, the Rand cooled back. Not all, but most of its loss upon markets completely reversed its losses. And our financial shares, which took a big whack in the month of May, more than offset what they lost. So it was a really good, good month for investors. And I guess it’s another reminder that whilst quality volatility is a source of discomfort, discomfort and mentally tiresome, it does pay to have your attention on the longer term and and base your investment decisions on valuations and not just what’s on your Twitter feed.

On the analogy ‘It’s time in the market, not timing the market’

I love that analogy and that’s why we use it quite often. And yeah, over the long term you do get rewarded for full risk. And I also know that it’s hard to endure at times, but without that volatility, you’re not going to get your inflation beating returns over the long term.

On retailers having an incredibly good run and the reason behind it

Well, if you cast your memory back to the month before, a lot of those retailers came out with market announcements and earnings updates and they pointed to the load shedding impact and sales being heavy. And then you had the rand going out, which implies high interest rates for longer and probably rising interest rates. And that’s not good for interest rate sensitive stocks such as Woolworths and Standard Bank. But load shedding actually appeared to be in such a dire state as was the previous month and also the rand recovered. So putting probably less expectations of higher interest rates, better consumer, more disposable income potentially and hence you get that bounce that we saw.

What to expect in July

Well, that timing question is obviously key, which I’ll find hard to answer and to plot practically. But yeah, look at resources. You had platinum shares down 10%, a strengthening rand. Two things you don’t really do for commodity shares I think through the cycle, given that these shares are down 20 to 25%, I think there will always be a demand for a lot of South Africa’s commodities. So yeah, based on that and where these ships are trading, I think that if you take a longer term view on resources and buy now, given their earnings potential. I think you’re buying hopefully quite close to the bottom.

On getting your sector allocation correct

I think the nature of our market, you’ve got two big drivers or sectors in the market that do things very differently. So you’ve got the resources which probably rely on a weakening currency, commodity prices, and you’ve got the financial interest rate sensitive, which factors are often very different. So what you saw last month is massive dispersion between those two sectors. So if you get your sector allocation correct. Then you can have returns of eight better to your peers or the benchmark. Those funds that outperformed last month no doubt had much larger exposure to financials, than interest rates sensitive shares.