Is the current global market rally an “echo bubble” as some suggest, or a sustainable recovery after a three-year downturn? And if you missed the 29% rally in local stock prices since April, is it too late to get in?
The answers to these questions naturally depend on your time horizon. Unit trust fund managers caution against trying to time market entries, an admonition backed by studies showing you’re better off with a buy-and-hold strategy.
The good news is that some local equities are cheap in global terms, and a few quality foreign stocks are beginning to look attractive.
Craig Pfeiffer, chief investment strategist at Sasfin Frankel Pollak Securities, says a case can still be made for adding a rand hedge element to portfolios given the long-term prognosis for a weaker rand.
Some analysts are forecasting equity returns of up to 29% for the next 12 months, a view disputed by Peter Urbani, chief investment strategist at Fairheads Asset Managers. “While this is not impossible in terms of the historical returns achieved it is entirely out of the question in terms of the expectations for resource shares (which make up almost 50% of the market) earnings being down by 30 to 40% at current rand/dollar rates.”
Urbani also disputes the prevailing view that local equities are cheap at an average price:earnings (PE) multiple of 11. He points out that over the past 35 years the average PE of the JSE Securities Exchange All Share Index was 13, which implies some potential for upward rerating, but taking a 75-year time horizon, the average PE was 10. “Thus we believe that equities should not yield much more than 17% unless the rand weakens substantially,” says Urbani.
Pfeiffer sees merit in domestic construction stocks, though their earnings may not be maintained at the heady pace of the previous couple of years. Banking stocks will also benefit from declining interest rates, though “they will be hard-pressed to to ply consumers for more fees and commissions than they are paying already,” says Pfeiffer in the latest Sasfin Group newsletter.
The domestic market is likely to dwell under the shadow of the rand. Fairheads expects the rand to start weakening in response to further interest rate cuts and a deteriorating current account balance. This is by no means a unanimous view, as some are calling the rand to R6,50 to the dollar in the next few months, and others see it going much lower, in which case domestic-only funds offer something of a safe haven.
Despite its galloping trade and fiscal deficits, the United States economy is showing flickerings of recovery, helped along by an accommodative monetary policy from the US Federal Reserve in the run-up to the country’s elections in November next year. “This probably means no further rate cuts but more importantly for the equity market no rate hikes before then,” says Urbani.
Under these circumstances global equities should show returns of 10% in dollars, global bonds 5% and global cash 2%. “We anticipate that Japan will continue with its recovery perhaps growing by as much as 2% in 2004, Asia and China will continue to grow in excess of 8% and that Europe will be the laggard with GDP [gross domestic product] growth of around 2%,” says Urbani. “This would effectively translate into global GDP growth of around 4%.”
A disorderly collapse in the dollar, escalating geo-political strife, a resurgence in inflation and slowing US trade are factors that could upset this scenario.
The Japanese market, which looked bombed out earlier this year, appears to be on the mend. The Nikkei staged an impressive 40% rise since May, and has become a favourite among many global fund managers.