Neil Thomas
TAKING STOCK
Small investors are dazed and confused. So they should be; a lot of big, professional investors are feeling pretty much the same. It’s time to take a deep breath, shake our heads and try to get a clear view on our investments. It also helps to remember that we are living in Africa, a truly wonderful place, though it can get a bit uncomfortable at times. At least it always manages to surprise. Pity our pale cousins on distant shores, where the most exciting event of the week is the local football match or debates over whether Lord Archer is guilty.
Adding to investors’ confusion is South Africa’s recent re-entry into the real financial world. Now we have the Nasdaq index, doing a fine impersonation of a yo- yo, hitting us from the one side, and Robert Mugabe from the other. Then there’s the rampant United States dollar and the limp euro squeezing the local currency from both ends. Talk about being caught in the middle.
But a large part of present investment uncertainty is because the outlook from South Africa was decidedly rosy at the beginning of the year. Y2K had come and gone, and we now know the Y stood for yawn and the K for a colloquialism meaning something like manure.
After the 1998 collapse and slow recovery in 1999, the outlook seemed straightforward – economic growth was going to be stronger than for a number of years, inflation was at a relative low and interest rates, and the rand, seemed stable.
All of this spelled a good year for equities, and numerous analysts and fund managers were giving upbeat presentations on the outlook for the Johannesburg Stock Exchange.
That was then. Now it all seems different. The irony, however, is that many of the economic fundamentals remain unchanged. The rand has taken a smack, welcome to the world of sevens, and negative perceptions from Mugabe’s behaviour are affecting the local market in the same disproportionate way as his grasp of reality.
But amid the disappointment, gloom and outright fear, there are definitely investment opportunities for those who keep their heads. Money can be made in times like these.
It’s encouraging to see that Jeremy Gardiner, head of unit trusts at Investec Guinness Flight, holds a similar view. Summarising all the problems besetting us at the moment, the worst of which he views as the country’s status as an “African emerging market” (it’s still okay to be a Latin- American or Asian emerging market), he asks where this leaves us?
His reply:”With an even cheaper market, an oversold currency and very positive earnings expectations.”
Gardiner goes on: “The fact that the foreigners see no difference between Zimbabwe and South Africa, coupled with the fact that they interpret Mbeki’s recent silence towards Zimbabwe as complicity, should be used as an opportunity.”
He also lays Investec’s head on the line by saying they stick to currency forecasts of R6,50:$ by the end of the year. If he’s right, then our current woes will probably only be a distant memory by then.
But what to do now? First is to decide whether to be in the equities market at all. Well, bonds are wobbling, money market rates aren’t great, so as long as an investor has a reasonable time frame (at least a year) and a little nerve, the answer must be yes. Especially with the local equities market looking generally undervalued.
Investing money offshore remains a capital idea, but only for diversification. The more money you have, the more you should put offshore. While rand weakness will probably translate to good gains for a while, investors looking at absolute returns should do better in this market over the next year or so. Besides, Nasdaq and the spectre of more interest rate increases is making the US market look increasingly dodgy. The weak euro and possible interest-rate hikes are also not instilling much confidence in European markets.
Investors going directly into shares will find incredible value if they look around. Some of the large IT stocks, big banks and commodity producers are looking good. Most, though, probably invest in unit trusts, and the safe money here will go into prudential and tracker funds, perhaps even the general equity funds. Under current volatile conditions these could beat the sector funds, though over the longer term they might become a bit boring.
Two neglected sectors, and not surprisingly so since they still fail to perform, are financials and small companies. The economic fundamentals are right for them, sooner or later they must start to come through.
Investors with money offshore and perhaps a decent general fund could look to these sector funds. The financials are offering good value, part of the problem is probably the wait-and-see of Nedcor’s bid for Standard Bank. And the small companies that have survived up to now should start to perform well later in the year.
Don’t write off the technology funds either. Many have a large rand hedge component, and once the US market settles down they should resume their growth path, even if not in as spectacular a fashion as before.
The key is not to panic and switch in and out of the market, or between funds, without some careful thought. And keep an eye on the long term. As Gardiner says: “We are being incorrectly tarred and therefore, as in October 1998, batten down the hatches and wait for it to blow over.”