The JSE’s bull run may have resulted in capital growth of more than 50% a year for nearly three years, but it’s not run out of steam just yet — at least, that’s the view of Stanlib, South Africa’s largest unit trust company.
Stanlib is still advising the hundreds of intermediaries marketing its funds to recommend to their clients that they continue to be “overweight” equities.
Stanlib director of retail investing Paul Hansen is the investment adviser’s investment adviser, and he is maintaining a pro-equity stance in the face of queries about just how long the run can go on.
However, Hansen acknowledges the possibility of bouts of profit-taking after such strong gains.
“The JSE all-share index is up 165% since its lows in April 2003, while total returns are up 190%. After a run like that it would be remarkable if pension funds and some other major investors did not take some profit.
“That said, we still see scope for equity upside with opportunities to buy into the corrections.
“Some believe that if a market almost trebles in three years, it must be over-priced, but some calculations indicate that certain sectors and counters have yet to reach fair value; suggesting more growth to come, especially if a selective approach is taken.”
According to Stanlib, key factors in the continued case for equities include:
- the impact of resources, which rose by 71,5% last year while other sectors did not soar to anything like the same level, a hint that further potential may now start to come through in other areas;
- company earnings of financials and industrial shares are up 73% since the lows of early 2003, with Stanlib asset managers forecasting another 16% rise in earnings per share in 2006;
- earnings yields of shares appear under-valued relative to bonds and cash (basically the 20-year average excess yield of South African government bonds over the financial and industrial earnings yields is on average 6,3%. However, that gap is currently only 0,8%. To lift the gap back to 6,3% implies that the financial and industrial index would have to rise by more than 30% and/or yields would need to rise sharply or a combination of the two); and
- calculations such as this suggest share prices have not yet adjusted fully to falling bond and cash yields.
The overall Stanlib house view is to be overweight equities and listed property, though it cautions that “juicy” property returns of recent years may now be over. The advice is to underweight bonds. As Stanlib notes, local bond yields are now about the same as cash, “so why take the risk on bonds?”
“There are always risks; for instance, the international situation and the oil price. But barring some major unforeseen event, the Stanlib view is that the bull market will remain intact,” says Hansen.