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January proved to be a down month for the US market but the SA Top 40 managed to rise, I suppose thanks to all those Rand hedge stocks and of course Naspers. I will never understand the desire to own this tech stock. Feels like all those China bulls who were riding the commodity wave have moved over to the China internet bubble now. Do they understand that many Chinese are sitting on negative equity on 2nd and 3rd properties that they bought at the height of the property market there? Anyway, good luck to them....

Interesting article on Moneyweb today about PSG moving into resource stocks:
http://today.moneyweb.co.za/article.php?id=808541&cid=2015-02-02#.VM8of2iUeKg

For what it's worth the overall strategy is probably correct but you need to pick your winners from the bones of the deceased very carefully. To help with this it's probably wise to think about the underlying commodity and who might stand to benefit...

Oil and Refined Products
The market is clearly beaten up. Local exposure is via Sasol. Brent has rallied and many are predicting the bottom is in. However, momentum is building up for one final push down, thereby trapping all those premature bulls in the old classic bull trap. Sasol will be a great investment but probably better towards end Feb and not now. Stay away from Sacoil and any others exposed to the upstream. The integrated oil majors such as Shell, BP etc. are all great investments as they are making up lost revenues on higher refinery margins i.e. crude has fallen faster than refined products.

Iron ore, chrome, manganese & other steel feedstocks
This sector is only for the brave. China continues to shut down steel plants left, right and centre as it battles with controlling pollution and overcapacity in the sector. They are offshoring their steel production now e.g. the IDC Limpopo project with Heibei Iron & Steel. Expect Arcelor Mittal to stay under huge pressure. Kumba Iron ore produces a good quality iron ore but even they must be pretty close to marginal production costs now. If freight rates between Saldanha and Asia start going up (they can only really go up from here) then they are really under pressure. Exxaro and Anglo are exposed. Glencore and Merafe are exposed on the chrome side. BHP Billiton is exposed on the manganese side. The whole sector is not pretty at all.

Coal & Gas
Coal might rally a little in the short term but only because the big traders are playing games on trying to set index prices for their Japanese buyers at the moment. Post this Feb / March "mating season" expect coal prices to come down or at least remain in the doldrums. Coal has really had its day as countries from the USA to China turn their back on it. Only South Africa and India will remain as major coal consumers. SA coal stocks will do OK if they focus on Eskom and domestic sales to cement mills, paper mills, sugar mills etc. But then these mills are also moving to gas which will benefit Sasol etc. Global gas prices are really weak too. Power utilities such as Eskom should be making a small fortune from this as power revenues rise and fuel costs fall. I guess they have other problems.... Glencore, Anglo and Exxaro are all heavily exposed to coal with Glencore probably controlling over 70% of the SA export market through off-take contracts with other juniors etc. In terms of juniors the message is clear... stay away unless they are 51% black owned and supplying Eskom. Wescoal will probably do OK as it controls around 80% of the high paying industrial coal market after they took over MacPhail. They will keep the local price high until these consumers all move over to gas.

Precious Metals
Equity markets are likely to have a bouncy 2015. Rising interest rates will also be positive for gold and platinum stocks. This should see precious metals doing well, especially when equities fall and interest rates rise simultaneously. Look for opportunities to invest in the low cost gold and platinum producers.

South Africa stands to benefit hugely from a strong trade account this year i.e. lower import oil prices and stronger export earnings from gold and platinum. This should help the ZAR to perform well against the USD and certainly against the EUR. That financial analyst (Magnus Heystek) who predicted the blowout of the ZAR and investing everything offshore is probably going to eat his words this year. I reckon we will likely get back to around 10 ZAR:USD this year, depending on what happens with our relative interest rates.

@The Trader, could you please explain how rising interest rates could have a positive effect on gold and platinum. The way I see it, rising interest rates entice people to leave there money in savings accounts and to buy bonds. Rising interest rates also drives down inflation, from my understanding this should reduce the price of gold or am I missing something out?

@The Trader, could you please explain how rising interest rates could have a positive effect on gold and platinum. The way I see it, rising interest rates entice people to leave there money in savings accounts and to buy bonds. Rising interest rates also drives down inflation, from my understanding this should reduce the price of gold or am I missing something out?

Hi Imran, the generally accepted economic theory is that rising interest rates drive down inflation and commodity prices. This does indeed play out in the markets but there are also other factors. Central Banks are the largest players in the gold game, having the largest holdings by far. As interest rates rise Central Banks pay out more cash and therefore trim their gold holdings to help fund this (spot gold price falls). However, Central Banks tend to maintain a fixed level of gold reserves (unless they are actively investing or divesting) so they do a spot gold loan and forward buy back i.e. the gold forward curve tends to steepen. This means that down the line there is more demand for gold in terms of buybacks. Traders are generally forward looking and they try to predict the net buyback or net disposals in the entire chain. If the buyback period co-incides with an equity collapse then gold soars e.g. 2008 credit crunch. China is also increasing its net gold reserves as interest rates rise and increase the value of their USD holdings i.e. they are swapping out of rising US bonds and other fixed income investments for gold. This helps keep the spot price of gold high in the face of rising interest rates.

The other factor is that rising interest rates do indeed mean better returns in fixed income and lower returns in equities. With US treasuries at such low levels and equities falling out of favour as rates rise, there is a tendency to diversify into gold instead. This is all part of the "search for yield" and "safe haven" trades. When this happens simultaneously, as I was suggesting in my post above, then gold has a real chance to rally. However, at the end of the day you cannot eat gold and it doesn't get consumed or destroyed. So, unless gold becomes some form of backing for a global bitcoin, I don't think we will see a one-way rally. Gold is always going to be used as a balancing mechanism to rates, currencies, emotion and global events. No one will ever understand the full picture at any point in time but it should continue to offer trading opportunities going forward. Savvy gold miners should be hedging 6 months out after every $100 rally and make sure they also have excellent FX traders on board.

More than 37 percent of the announcements in January originated from the nation's No. 1 oil-producing state -- Texas. Mine Yucel, head of research at the Federal Reserve Bank of Dallas, said last month that 140,000 Texas jobs directly and indirectly tied to energy will be lost this year if oil stays near $50 a barrel.

Bloomberg.