Last year was massive for South African equities — again! Despite reasonably conservative forecasts at the beginning of the year, the JSE delivered a massive 41%, its fourth consecutive positive year.
From lows of 7 334 in April 2003 to current levels of 27 000, the market is up an enormous 260%. This has to a large extent been driven by the longest commodity bull run in 30 years and the longest period of economic expansion since World War II.
So what does 2007 hold? South Africans remain cursed by the trauma of the “boom bust” economics of apartheid, whereby every economic party was inevitably followed by a vicious hangover. This caution has seen many South African investors adopting a far more cautious risk profile than appropriate, which has cost them dearly.
The other lesson branded into the psyche of investors after the trauma in equity markets during the period leading up to March 2003 is diversification. Investors will not easily again allow themselves to get caught overweight in equities, so they now have a spread that includes listed property, hedge funds, derivatives and so forth, not all of which they understand.
Many of these instruments offer protection; however, protection comes at a price and often investors do not understand that price.
Perhaps the most important lesson is to avoid buying overpriced assets. This mistake is what led to investors getting burnt in the small-cap bubble of 1998, the tech bubble of 2001 and the dollar/rand bubble of 2001.
Once again, for the past two years, the market has been full of advice to ‘take money off the table” and to ‘diversify out of equities”, which were supposedly due for a correction.
Given that the JSE may well be fairly full at current levels, now would therefore not be the time to put conservative investors into an index-linked product. However, for good stockpickers, opportunities certainly remain. Our recently reopened Value Fund is on a PE of 12 with a dividend yield of 4%, which is by no means in dangerous territory.
While there may well be a correction at some stage this year, as long as assets are not in dangerous territory, they should recover fairly quickly.
South Africans must not be lulled into a false sense of security by the fact that the rand only dropped roughly 10% against the dollar last year. We trade more with the Eurozone and South Africans go on holiday more to the Eurozone and United Kingdom, so why the obsession with the dollar? It probably lies in the fact that most of our imports are in dollars, particularly oil.
However, against the euro and sterling, we were down 19% and 20% respectively last year. You will not find a better argument for offshore diversification than that, and therefore we would once again recommend to clients that they avail themselves of the opportunity to invest offshore.
Where is the world going in 2007? The fortunes of the United States housing market are key. Much has been written about the imminent collapse of the US and therefore the global housing market, and this has to a large extent been priced into US equities in particular.
We, however, see a more benign slowdown. In this scenario, the US consumer consumes less, but the shortfall is ameliorated by a pick-up in spending by Asian and European consumers, leading to a global economy that slows, but does not stumble.
This would see a stronger-than-expected US economy and global economy, and a fairly stable dollar. We are also less negative on the prospects for the dollar than the fairly pessimistic consensus. If our assumptions are confirmed, the world should enjoy a reasonable year for 2007, and that is not in the price!
Jeremy Gardiner is a director at Investec Asset Management