Despite economic crises, there’s money to be made on the stock exchange, writes Mark Allix
Following the plunge of the Thai baht in July last year, the volatility on global stock exchanges is starting to take on biblical proportions – particularly the hellfire-and-brimstone warnings of the Old Testament variety.
The 10th Commandment on covetousness and visions of plagues and cursed generations might well give today’s individual, or first-time, investor pause for thought.
Where can one hope to grow one’s hard- earned cash when the global economy is roiling in the wake of Asia’s economic meltdown and the explosive antagonism between two of the world’s most recent de facto nuclear powers?
The truth is that much of the health of large financial institutions is firmly in the hands of individual stakeholders because, in the final analysis, the investment cross- holdings of giants such as Sanlam or Old Mutual are driven as much by small-investor perceptions as by the machinations of the global market.
Jac Laubscher, chief economist at Sanlam asset management, says the key to balanced investment is to look for “relative value”.
At the end of June 1997, the Johannesburg Stock Exchange (JSE)all share index was hovering at an all-time high of about 7 420 points. As of June 1 1998, the same index was flirting in the 7 440 range, or as Laubscher puts it, “virtually unchanged”.
On the face of it, this means that investors who went into the market a year ago have seen their investments stagnate, even though the all share index rocketed to about 8 200 points in mid-April this year, and some stocks have continued to flourish in the current subdued market.
“The all share has given up all its gains, which speaks of volatility,” says Laubscher. But at the same time, he hopes people won’t overreact to short-term events.
With the threat of higher interest rates on the back of the bad news that has flooded the market lately, Laubscher says institutional fund managers will have to decide whether higher rates will buffet company earnings and have a negative effect on the economy, or whether there will be a postponement of higher interest rates (which the economy is crying out for), and which Laubscher says will have a less serious impact on the economy.
With the likelihood of higher rates, Laubscher says bonds are up more than 200 basis points from April, creating relative value regarding equities and bonds. “The relative value has shifted in favour of bonds for the six-month to 12-month view,” he says.
He also says institutional fund managers will take into account changes in the economic outlook and will adjust equity selection in a share portfolio in line with higher interest rates.
Laubscher says that investors must ask themselves, “If I bail now, when am I going to go back into the market?”
He questions whether investors who left the market in October last year – when the market suffered its worst ever crash, with the all share index dropping 813 points to 5 950 (having been at 7 168 points days before) – could have been back in the market on January 12 this year when the all share plummeted to 5 597 points, prompting one broker to say: “There’s no reason to own shares anymore.”
“Rather stick with investments than playing shorter-term fluctuations,” says Laubscher.
He says that while the mining industry has negatively impacted on the all share index, industrial and financial shares illustrate the principle of “relative value”.
“They have certainly done better and have better prospects,” he says, adding that small investors have to decide for themselves which decisions they will be responsible for and which decisions to leave to the fund manager.
Laubscher says investors should opt for managed fund portfolios with a spread of financial instruments, such as bonds and equities, rather than specialised funds, where the responsibility for choosing the instruments lies with the individual investor.
Gil Lang, portfolio manager at brokers Cahn Shapiro, draws a distinction between cowboys in the market and “timeless” shares. “If [investors are] in information technology [IT] stocks, they are in for a bumpy ride. You can’t just buy hot air, there has to be value,” he says.
Lang says that the technology sector has too many companies vying for the same slice of pie. Recently listed IT and Internet-related firms are particularly bad news, he says.
“There is too little quality and too many deals at the wrong prices. [Such] companies will do anything to raise their market rating.”
He also warns that “glamour stocks” are a dicey bet, adding that today’s IT stocks occupy the same position in the market as property developers and builders in the late 1960s, and gold shares in the mid- to late-1980s. “Glamour stocks can’t go up forever.”
While IT firms such as Dimension Data (Didata) are high-quality companies, Lang says the time to buy into them was five years ago. “I’m not saying it’s not going to increase … but to buy Didata now, you may as well be buying De Beers,” which has languished, he says.
However, as part of a portfolio of stocks, Lang says that investors should get into “timeless” shares such as De Beers. “It’s weak, but timeless, and always recovers. If 40 companies list now, 30 will de-list or merge by 2005 to 2007, and some will be insolvent, but De Beers will still be in business.”
Lang says investors should look at companies that are starting to fly, such as Forbes, the financial and professional services group, and “look for the next Brian Joffe”, chair of distribution, service and trading group Bidvest.
He says penny stocks may be the place to go, but such companies are all trying to get into the IT, electronics and information services market, which is already overcrowded. “One company usually eventually dominates.”
The recipe for measured investment is to balance the dangers of market high- flyers, with high price/earnings ratios, against shares with more moderate yields.
Firms with overblown price/earnings ratios indicate that “somewhere, something is going to pop”, but companies with a more moderate yield suggest that “I won’t lose my pants on this”, says Lang.
Chris Wilde, director of equities trading at Deutsche Morgan Grenfell, still believes there is value to be had in financial, insurance and, to a lesser degree, high-tech stocks, both for individual investors and institutions. However, he says, the spectre of higher interest rates will hit consumer, retail and motor shares, because investors’ disposable income will dwindle.
The millennium bug will also affect investors. Wilde says this is regarded as a serious problem, and the JSE is not as far down the track as regulators are in the United States in requiring all listed companies to disclose their spending on the problem and the degree to which they have resolved it.
He believes smaller technology stocks involved in the resolution of this problem may be a good place to invest, as may businesses involved in the Internet and associated networks.