Shaun Harris
TAKING STOCK
With the end of the year hurtling down on us like a minibus on the N3, a lot of people are trying to form a view on where the local economy and investment markets are going.
Those brave enough are even trying to see past the mother-of-all New Year’s Eve parties and Y2K fears and, gulp, take a view into the year 2000.
Officially, the immediate outlook is pretty good. The latest cut in the prime lending rate brings it to a five-year low, stronger growth is forecast in the local economy and stock market prices are expected to rise.
But investors are nervous, scarred by the high interest rates of a year ago and not quite sure what the end of the year and the Y2K threat will bring.
Irrational it may be, but many of us who still have some disposable money are seeking refuge for it under the mattress.
Peter Linley, investment head at Old Mutual Unit Trusts, says that in South Africa the equity market is expected to outperform other classes of assets over the next 12 months. This view is well researched and backed by the 50 or so professionals at Old Mutual Asset Managers, but what are their investors doing? Pumping money into the company’s money market fund, which metaphorically speaking is a mattress in a declining interest rate environment.
Portfolio manager Dave Rossouw says about 25% of all funds invested in the unit trust industry are currently going into money funds, R23-billion at the end of June.
It’s not hard to understand this reasoning. Rossouw says while the worst fears over Y2K disruption are likely to be unfounded, “investors will probably follow a cautious attitude, re-entering the equity market early in the new year”.
Problem is, if we are all still here in the new year and the equity market performs as expected, investors moving in late could miss a substantial part of the run.
Just more than a year ago there was a sensible scramble for money market funds as global share prices collapsed.
But by the time investor nervousness had subsided and toes were dipped into equities again the recovery was well under way. Few private investors, it seems, and not too many asset managers caught the early stages of the strong re-rating of commodities.
Money market funds are certainly safe and are offering a not unattractive return of 13% or more an annum. But that’s nothing against the Johannesburg Stock Exchange’s (JSE’s) all share index which has put on about 50% over the past year and is expected to keep powering on. Even local bonds are returning more than 14% and are as safe as the money market funds. It’s debatable what will be affected most by Y2K fallout, if it happens – the country’s large banks or the government and the big utilities.
Most of the key indicators for the economy, and by extension share prices, are favourable. By consensus among economists, interest rates are not expected to decline any further this year but should fall again next year.
Piet Calitz, investment economist at Gensec Asset Management, sees a further reduction in rates of 0,5% to 1% next year, which will probably be the bottom of the interest rate cycle.
But signs of the real economy improving are starting to come through. Calitz sees the recent sharp uptick in new car sales and retail sales as indicator of this.
Rian le Roux, who heads up the economic research unit at Old Mutual Asset Managers, expects headline inflation to dip below 3% by the end of the year. More important, while he expects the rate of inflation to lift next year he believes the introduction of inflation targets and general downtrend in inflation could lead to a sustainable rate of about 5% over the next two to three years.
The combination of a lower average rate of inflation and lower interest rates should mean more disposable income. If this is applied to the expectation of stronger economic growth in South Africa next year and better corporate profits, then local equities are the place to be.
And just to add cheer to this rosy picture is the recent firming of the gold price and jump in the JSE’s gold index, though gold has
become such a fickle indicator that it’s probably best left out of future investment planning.
Of course there are risks. The stable rand, which Le Roux expects to hold up and be around R6,25 to the dollar by year-end, is both a blessing and a danger.
We know what happened the last time there was an attack on the rand. Next time it happens there’s the added unknown of new management at the Reserve Bank.
We are also an emerging market open to global influences. There’s little doubt we fared better than many of our fellows in the last emerging market crises, but as the unionists say, an injury to one is an injury to all.
Playing it safe – in bonds, money market funds, or under the mattress – may be sensible, but will not give the best returns. Investors need to look through the end of the year hype and Y2K and take a view on equities now.
Come the morning of January 1 2000, the best use for a mattress will probably be to nurse a head weary from the excesses of the night before.