According to the latest Citywire ratings, Fairtree Capital’s Jacobus Lacock tops the list of South African fund managers. The Fairtree Balanced Prescient fund, which he co-manages with Stephen Brown, has returned 35.1% over the past three years, against a category average of just 12%.

The AAA-rated Lacock offered Citywire his views on the current environment and some of the key drivers that he expects to influence markets over the next year and a half.

What opportunities do you see in the next 12-18 months?

‘We have been bullish on gold and gold companies for more than 12 months and believe there is more upside. The metal benefits from the continued accommodation by global central banks and fiscal authorities that have pushed real rates to new lows. We believe this accommodative environment is here to stay for the coming years.

‘We see evidence that monetary, fiscal and foreign policy has turned more reflationary, which may cause inflation expectations to rise. This force will keep real rates low and in negative territory in core developed markets. We also see increased scope for the US dollar to weaken as rate differentials narrowed and twin deficits in the US came under more pressure. Lastly, increased geopolitical risk also added scope for the gold price to remain high.

‘Interestingly, these same fundamentals may drive emerging market assets. We may see the same environment of high liquidity, low volatility – and a search for yield that was present between the GFC and taper tantrum – evolve over the coming year. However, we need to cross some headwinds in the short term, namely the US election, volatility and Covid-19.

‘On the local front, South African bond yields are very attractive both on an absolute and relative basis. Some domestically exposed equity sectors are trading at exceptionally low valuations and have significant upside potential should our local economic and political landscape change for the better. We are constructive and see signs that the economic outcome may be better than currently priced by the market.

‘Another potential opportunity that may well play out is that of a sustained bubble developing in some pockets of the equity market. The sheer amount of monetary and fiscal stimulus provided to the global economy, which is at least twice that of during GFC at around 8% of global GDP, combined with low government bond yields, has pushed allocations and cash towards equities. This may well be the pain trade for many investors over the coming year.’

What’s your view on the rand?

‘I believe the conditions exist for the rand to appreciate over the next six months. The US election outcome and a potential Covid-19 vaccine are contributing factors. But given that South Africa’s terms of trade have improved and the current account has turned positive, the headwinds to rand appreciation have faded.

‘Foreign positioning in local assets is also low and could provide a welcome boost to the currency should investors return. A key factor to my view, however, is that the US dollar will weaken over coming quarters.

‘The dollar is a counter-cyclical currency, and the US is sitting with large and increasing twin deficits. The drivers for the US dollar have moved from being bullish to bearish, and it may face significant downside, which is good for emerging markets.’

What impact will the $4.3bn loan from the IMF have on our markets?

‘There is no direct impact, apart from the fact that the package comes with very low financing cost of around 1% that may alleviate some pressure on the fiscus. The IMF package doesn’t force reform, but policymakers have written a letter of intent that suggests that they accept the funds on the basis that fiscal consolidation and the Sarb’s mandate will remain in place.

‘The mere fact that South African politicians accepted funding from the IMF is a positive sign and may pave the way for a larger package in the future.’

What keeps you awake at night?

‘I’m most concerned about what may lead to a major contraction in asset markets, or cause an economic or earnings recession. For those, prevailing financial conditions are often the determining factor.

‘At present, the run-up in some equity valuations; rising geopolitical risks between the US and China as well as China and Taiwan; and the consequences of the current accommodation provided by central banks and fiscal authorities are the key areas to monitor.’