With the JSE Securities Exchange galloping past the 15 200 mark after another meteoric rise of 22% so far this year, one has to question whether it is wise to be investing in shares at the moment. Or is the market reaching the sort of temperature that could cause burns?
According to Wayne McCurrie, chief investment strategist at Advantage Asset Managers, the market is certainly no longer cheap after a sustained rally since May 2003 that has seen it rise by 100%. However, the message is that the market is reasonably valued rather than overvalued. McCurrie says that our share market probably still represents the best opportunity that we can find.
McCurrie believes that equities will still perform better than cash and that the risk of a market crash is limited. ”There are times that the market becomes fundamentally overvalued, but this is a one-in-15-year event. At the moment, we are not in danger of being overvalued, but we must also not expect 30% returns. Our view is that the really easy money has been made and investors must not expect another major rise from this level.”
Unlike the market crash in 2000, there are positive fundamentals supporting both the economy and company profits. Heiko van Wyngaarden, of Oryx Investment Management, says South Africa seems to be on the brink of a fixed-investment boom on a scale that has not been seen since the 1960s.
Much of this is a result of heavy infrastructural expenditure. Mark Ingram, analyst at Sasfin Frankel Pollack Securities, estimates that about R200-billion will be spent in construction over the next 10 years. This year alone, the industry should generate around R90-billion. Van Wyngaarden says this colossal spend will support the earnings of a broad range of listed companies.
At the same time the bank balances of consumers are looking very healthy. Van Wyngaarden says the bad debt ratios of the late 1990s are gone and overall debt ratios are near record lows. With such low interest rates, the cost of servicing debt is at the lower end of historical ranges.
Van Wyngaarden says another major impetus for the economy has been the emergence of a black middle class, which has also increased the stability of the socio-political system. He also points to the positive sentiment that surrounds South Africa internationally as evidenced by the Barclays/Absa deal as well as the recent upgrade of South Africa’s sovereign risk rating by Standard & Poor’s to BBB+, which is one notch away from the coveted A-rating.
Although things appear to be rosy, one has to watch out for warning signs. According to McCurrie there could be a bull market brewing. Although rationally the market should cool down to a 10% to 13% return per annum, we may find that irrational exuberance takes over and the market suddenly shoots up, delivering the next three years’ returns in the next six months.
”If this does happen, then there could be a risk of buying into an overvalued market.” McCurrie says the rule of thumb is that, given the current economic conditions of low inflation rates and a stable rand, the current market price earnings ration (p:e) is sustainable at 15 times. However, if it rises to 17 times, which at current earnings would bring the FTSE/JSE index to 18 000, it would become overvalued unless there is a substantial improvement in company earnings to justify the re-rating. ”At the end of the day, the risks of not investing in equities are higher than investing over the long term, but you need to beware of overvalued situations,” says McCurrie.
Long-term options
South African equities are no longer a bargain buy. But waiting for a better buying opportunity could be counter-productive if shares continue to climb. If you were not fortunate to cash in on the ”easy money”, there is still opportunity for long-term growth from companies that are benefiting from the strong economy.
Craig Pheiffer, chief investment strategist at Sasfin Frankel Pollak Securities, says in a fully valued market you need to look for individual shares that offer better opportunities, rather than just buying the market. A key element is to focus on dividend yields. ”Buying a share with a high dividend yield means that even if the share comes back in the short term, you are still being rewarded for holding the share through the dividend income which allows you to ride the short-term volatility for the longer-term returns.”
Pheiffer says while most shares have already had a good run, there are still shares that are worth buying over the longer term:
- Mr Price will continue to benefit from the consumer spend. It is a solid company with a strong forward dividend yield.
- Tiger Brands is another favoured share that should continue to benefit from strong consumer demand and a strong pharmaceutical offering in Adcock Ingram.
- Imperial is also being driven by strong consumer demand and higher car sales.
- Group Five and Barlowworld should see some of the benefits from the massive infrastructural spend by government, Telkom, Eskom and Transnet.
- BHP Billiton is well placed to take advantage of the Chinese boom, with a broad basket of commodities that include oil and base metals.