It is likely to be a tale of two halves for local and global financial markets and investors this year, with conditions tough during the first half of the year but markets beginning to factor in a better 2009 during the second half based on the positive impact that lower global interest rates will have.
This is the view of Peter Brooke, head of the Macro Strategy Investments boutique at Omigsa, who says that from here, equity and listed property will again outperform other asset classes during 2008 notwithstanding their volatile start to the year.
His longer-term view is that local equities will return between 10% and 13% a year as company earnings are supported by still-robust real economic growth of 4,5% (in 2008) to 5% (projected for 2009).
“We’re currently in the midst of a mid-cycle downturn that is painful for consumers and investors alike. As we expected, volatility has increased sharply, but sentiment has deteriorated even more rapidly than expected, and markets are bearing the brunt of the fallout, with the JSE experiencing one of the largest monthly declines in its history as of January 21.
“But in South Africa, thanks to the ongoing fixed-investment boom, a strong fiscus, the global commodity boom and real wage growth, the five-year outlook for the South African economy is still strong, and this will underpin our equity market.
“While the market isn’t likely to rebound straight away, conditions should start to improve in the second half of the year. A good deal of bad news has already been priced into equity markets, and in the next few months central bank action should help to revive key economies like the United States. There should also be greater certainty surrounding the sub-prime crisis and the health of banks’ balance sheets.”
Brooke says there are already some very attractive investment opportunities opening up on an individual share basis, particularly where there has been panic selling from offshore investors — some shares are offering dividend yields of more than 7%.
The Macro Strategy Investments boutique has identified several shares that are offering excellent value. For example, Investec, which has been hit by the subprime crisis, is offering a greater yield than the after-tax return on cash. Aveng and Richemont, meanwhile, are supported by strong long-term structural themes in the infrastructure and consumer sectors.
Brooke is also increasingly excited by the value created by the recent sell-off in listed property. “Due to its solid growth prospects, the sector’s forward yield is 9% — more attractive than the 8,5% offered by bonds, especially when one considers property’s potential for long-term growth,” he points out.
Offshore investments are also a good option at present for those needing further diversification, advises Brooke. “The rand is currently vulnerable to global risk-aversion and the large current-account deficit, so it’s a good time to consider taking some money offshore.
“But be selective as to which country and asset class you choose — many developed-country bond markets and residential property markets are not expected to offer good real returns. Generally speaking, listed equity and property offer much better value than residential property.”
Regarding cash, he observes: “Cash yields are high and could move even higher, should the South African Reserve Bank raise interest rates next week — although we think this would be a policy error. We don’t expect another rate hike, but we also can’t see interest rates falling until next year, once inflation falls back within the target range.
“Therefore cash remains attractive in the short term, but as markets look forward to 2009 and lower interest rates, this will provide uplift to equities.”
In conclusion, Brooke says, the correction now under way will certainly be painful, but investors with longer time horizons should avoid any panic and remain overweight in equities.
“Barring any unforeseen shocks, conditions should start to look brighter in the second half of the year. Inflation is set to peak in the first quarter, food and oil price increases should slow, and interest rates are also likely to have peaked.
“Global uncertainty and risk aversion should also be improving by June, helping to alleviate some pressure on the rand. All told, South Africa’s solid growth and lower inflation story remains intact over the longer run. So hold on tight and stay focused on your long-term investment goals.”