Recently the JSE lost 6% of its value in just three days. While there has been a subsequent recovery, it highlights the fact that market volatility is increasing dramatically.
Wayne McCurrie, deputy MD of Advantage Asset Managers, says such high levels of vola-tility are indicative of a market that is abnormally valued. In this case it would be pointing to a market that is overpriced and looking expensive.
Although some analysts have been quick to point out that this is simply a case of profit-taking and that all is still well, McCurrie says that moves of this magnitude are too big to be merely profit-taking. ”What this tells me is that certain investors decided that the resource cycle was over and that resource shares and emerging markets needed to be sold.”
McCurrie says that while it is difficult to call any single movement in the market as being a terminal event and one that will start a new phase in the market, he believes that what happened last Friday and on Monday is a clear indication that resources are moving out of favour.
”The biggest decision we have to make when investing is whether or not we are in a new phase of perpetually high resource prices. This would mean that the China and India phenomenon is sustainable.”
This would be good news for resource-rich emerging markets such as South Africa. But McCurrie warns that if we are in a normal resource cycle, then resource shares and emerging markets will eventually fall.
This could be a sign of the start of a resource down-cycle, suggesting investors have taken the view that resource prices and emerging markets are overvalued.
This year so far foreigners have been net purchasers of South African equities to the tune of R50-billion. Over the same period last year they had bought just R11-billion of South African stocks.
Much of these purchases have been in resource shares. If foreigners turn negative on resources and emerging markets, the sell-off will have enormous impact on the market, as was experienced in the past week.
But this also means that listed companies focused on the local market will be less negatively affected over the medium term.
Jeremy Gardiner, of Investec Asset Management, says it is important for investors to remember that South Africa has strong economic fundamentals and is better off than most other emerging markets. The country also has a strong consumer base, which will continue to benefit local companies.
Gardiner warns unit trust investors against a knee-jerk reaction to the recent market movements. ”Markets have been up 18% in the first four months this year, which is crazy — it can’t continue. But we still have a view that the markets will end 25% up this year and we are sticking to it.”
He says investors need to take a long-term view and not react to every short-term movement because they will get burned.
Gardiner says conservative investors should be in cash right now, while investors who want some limited equity exposure should be invested in funds with 40% equity exposure.
McCurrie says that when trying to select the right shares, particularly in such a volatile market, logical investment decisions need to start with the investor’s view of what the economy is going to do.
If you believe in a low-inflation, high-growth scenario you need to ask if share prices accurately reflect this. Are they perhaps too positive and overvalued or have they not fully factored in the positive economic scenario and offer value? That will determine when and in what you invest.
McCurrie says he believes that, globally, interest rates could go higher, resulting in slower growth and lower demand for resources. This means that resource shares are currently overpriced. This does not, however, necessarily apply to non-resource stocks like retailers and banks.