Goldilocks and the three-tier market

By Steven Crouse

I have long been drawn to the power of analogy when illustrating a scenario to my audience. Their ability to associate with and relate to a situation they have seen or heard about, is often the surest method of understanding my reasoning.

I recently attended the Nedgroup Investments Global Summit in London, an annual conference hosted at the London Stock Exchange aimed at bringing together some of the world’s leading thinkers to share their thoughts on the current state of investing. This year’s conference was dominated by luke warm feelings towards global asset markets, volatility and what the future holds – something dubbed The Goldilocks Market.

Looking back at 2017, global equity markets continued their strong performance, returning almost 20% in US dollars after an almost-as-strong 2016. But what typified 2017 as a stand-out scenario was that the range of volatility experienced was historically low. Daily market movements were so narrow that commentators called it ‘the calmest bull market in history’.

When volatility re-emerged in early February this year, 2017’s calmness clearly abated; markets corrected by some 10% during the first few weeks of the month alone. However, the environment is still clearly one that is ‘not too hot, and not too cold’, hence the Goldilocks analogy.

Goldilocks, after stumbling upon the cottage belonging to the Three Bears, and finding Daddy Bear’s porridge too hot, Mommy Bear’s porridge also too hot, but Baby Bear’s porridge just right, it brings us back to our ever-intriguing local market.

The 2017 calendar year and the three tiers of the JSE are well represented by this story:

  • The top tier, Daddy Bear, is really one single company making up some 25% of the entire value of all shares traded on the JSE. And because this company holds a significant stake in one Mega-Cap Chinese tech company called Tencent, it also happens to have very, very little of its earnings and profits related to South Africa. (I’m referring to Naspers, in case you weren’t sure…) Much like Daddy Bear’s porridge that was way too hot for our dear Goldilocks, and much like the big man-of-the-house – what Daddy Bear says, generally goes – so it was too for the market in 2017. Naspers, making up roughly one quarter of the value of our stock exchange, performed exceedingly well that year, pulling up the overall index with it. However, it’s still a little too hot for our liking.
  • The second tier, Mommy Bear, is the group of rand-hedge industrial shares. That is, companies that generate a significant portion of their earnings from overseas markets and provide investors with a hedge against any rand weakness. This would include companies like MTN, British American Tobacco and Richemont to name a few. But this porridge also appears a little too hot for us right now.
  • The third tier, Baby Bear, is the rest of the market: companies with strong ties to South Africa, and the economy we hope to witness growing again under the stewardship of President Cyril Ramaphosa. Just like Goldilocks found Baby Bear’s porridge, these companies look just right! Strategy is about considering options and making a choice. At the heart of your investment strategy is the constant choice between what to do and what not to do. From our current standpoint, Goldilocks is eating Baby Bear’s porridge; she is finding it quite palatable, delicious and nutritious; and she appears to be enjoying it too.

So, while we wait for her to finish, we’re simply standing by and observing closely. One might even be so bold as to describe us as quite optimistic. Cautiously so, but optimistic nonetheless!