In this year’s asset allocation, brokers move away from equities towards gilts, reports Jacques Magliolo
The investment climate for 1995 will be less favourable than in recent years because of increasing interest and inflation rates, and a reduction of international investment in emerging markets.
Frankel Pollak Vinderine’s Asset Allocation document for this year, released at the company’s annual investment conference this week, shows the firm believes that, as a percentage of total portfolio, investors should reduce exposure to equities and property, while placing more funds into government bonds and cash.
It suggests the following portfolio: 57 percent in equities (1994: 67 percent), 10 percent in property (12), 12 percent in cash (10) and 21 percent in gilts (11).
Another stockbroker, Martin & Co has taken a similar decision. It recommends a five percentage point reduction in equities and to move these funds into gilts.
Martin & Co analyst Graham Baillie says: “We have taken an investment decision that the gilt market will perform better than equities. It is not a view that the market will be in a bear run.” He says that they expect to get a seven percent real return from gilts, while equities will offer, at best, a zero real return.
Keith Bright, analyst at Cape Town-based institution Foord & Mentjes, confirms institutional thinking follows similar patterns: “World markets are undergoing a correction and must ultimately rub off on us.” He believes that “on balance fund managers are reducing equity stakes and keeping cash on hand.”
Why the sudden change in focus? For the past two quarters analysts have been expounding a belief that, while the market may be overrated, it will remain buoyant as a result of high corporate earnings.
Frankel expects strong corporate earnings to continue. “Good earnings growth (25 percent for the weighted All Share Index) is projected for most JSE sectors in 1995 and should support the market.”
If companies produce solid results, which establish positive investor sentiment and thus keep present ratings high, why shift out of equities and into gilts?
There are two reasons:
* The JSE normally shifts to more conservative price:earnings ratios (share price divided by earnings per share) in a period of about 12 months into a new earnings growth cycle. There are no reasons why prices should not drop now.
* The expected rise in equity earnings growth will offset the tendency of the market to trade at a lower price multiples and for 1995 a rise of nine percent in the All Share Index is foreseen,” says Frankel.
Economists suggest that there are three main facts which will result in a less favourable climate, which should dampen investor sentiment.
Short term interest rates will be higher as monetary policy tightens. Higher imported and food product prices, excessive wage demands and a rising general demand will force inflation to increase.