Financial services company Old Mutual Investment Group senior portfolio manager John Orford warns that, owing to commodity prices, which are unlikely to recover strongly in 2015 as a result of the extent of the supply-side response in oil and iron-ore, as well as the underlying slowing of China’s growth, investors should remain cautious about South African resource equities.

“While the weakness in commodity prices is not something new, the extent of this weakness – particularly the recent weakness in oil – has been a surprise to the market,” he notes.

However, Orford mentions that, if the weaker oil price is sustained, this will boost consumer discretionary spending as well as keep inflationary pressures in check.

Moreover, considering the local market and economic outlook for 2015, he points out that, in the local economic horizon, interest-rate-sensitive sectors such as general retailers and listed property have done better than was generally expected. Since the beginning of 2014, both property and general retailers have outperformed the JSE shareholder weighted index by about 6%.

“If interest rates do not increase much over the next 12 months and the rand and bond yields remain stable, interest-rate-sensitive sectors and stocks will likely continue to perform reasonably well. However, stock selection remains critical as company performance is diverging, with relative share price performance reflecting this,” warns Orford.

Moreover, Orford states that equities will continue to surprise on the upside, given their high positive correlation with global equity markets. Also, the fact that many companies listed on the JSE earn a significant share of their revenues outside South Africa, and are therefore somewhat insulated from the domestic economy, will contribute to the high positive correlation in global markets.

“Furthermore, should economic conditions begin to improve [in 2015], the recent better performance in the more locally focused parts of the equity market (banks, for example) could be sustained,” he concludes.