Charlene Smith
South African shares continue to attract strong foreign interest as nervous investors scuttle away from South-East Asian markets – all of which is having a positive impact on unit trusts and managed portfolios.
But it may be too early to bring out the champagne.
Tony Bell, head of fund management at Nedcor Investment Bank’s asset management division, notes that the Johannesburg Stock Exchange’s all share index is up more than 40% since January this year, from 57,50 to 81,20. “Strong corporate profits and lower interest rates have fuelled the current surge in market activity, as has the influx of foreign investment.”
But, Bell says, “part of the increase can be interpreted as a correction of last October’s meltdown. If we consider the October pre-crash high, the market is currently up only about 12%. In January, the overall price/earnings ratio was 12, and we were considered cheap.”
“Currently, the [ratio] is about 20. When compared to Wall Street, which is at a price/earnings ratio of 24, we’re not as cheap as we were. The Dow Jones has increased by 30% per annum over the same period.”
Dianne Playfair of PSG Unit Trusts concurs. She says Japan’s economic package announced last week has prompted fears of stronger economic growth in the United States and rising inflation, which may prompt the Federal Reserve to increase interest rates.
All of this could send shock waves through the South African market.
Bell said it was important to remember the impact of the US market on our own. “Wall Street seems increasingly nervous. Pension-fund switches into unit trusts seem to be tapering off, and the US Federal Reserve is keen to cool the market down a bit. The US market would respond negatively to the slightest hint that interest rates are set to rise. And it is anticipated that corporate earnings will be lower in the next quarter because many companies were affected by the Asian crisis.
“There is also the impact of the bad debt situation in the Japanese banking system. Should the Japanese start to reduce their holdings of US treasury bonds, a knock-on effect could be precipitated.
“This could not be done without buyers, but should they be able to sell part of their holdings, the US bond market would weaken and this would bode ill for the US equity market.”
Bell says foreign investment has helped bolster the local market. “But we need to be aware of the additional risk of higher volatility that foreign investment brings.”
The overall view from the investment community is that now is not the time to sell, because the market will continue to be volatile. Rather hang on to your investments, or even boost them and watch and wait while the added impact of moves toward a common European currency also slowly starts to filter through.