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Cash is trash

04 May 2006 Angelo Coppola

Peter Brooke at Old Mutual Asset Managers in SA looked locally at equities and says that there are no surprises, although the speed of the high performance was faster than they had expected, because it coincided with the emerging market bull run.

Local equities will stay the asset class although return expectations should be revised downwards. Tactically the risk reward basis has deteriorated, and there should be some cash to buy into the correction.

If he was going to offer any advice to retail investors he would suggest that time in the market is the way to go, in terms of reducing volatility.

The multiples are starting to kick up on the local equities, and the forward price earnings multiples are higher than the historic averages, which could be a structural re-rating. The house view is that they are comfortable with local equities.

The emerging market bull run could also pose a risk, in his mind, although the country has performed in line with the other emerging market benchmark countries. There is a 90% correlation between SA and the other emerging markets.

The JSE set a record on foreign portfolio inflows of R52bn. The numbers for this year are equally astounding R42bn thus far, but there is a dark cloud looming, says Brooke.

The money comes in the rand stays strong, growth kicks up, earnings multiples climb and the virtuous circle continues.

Its called a roller-coaster and it relates to the relative size of local equities, which is essentially a rounding error when compared to global equities. There is a risk of increased volatility.

If there is an increase in the risk of an emerging market correction then South Africa will also feel it to a greater degree.

The international and USA interest rates are set to rise and added to which the foreign portfolio managers have been the only buyers of local equities, as local managers are already at their maximum percentage holdings. Foreign sellers could weaken the rand, crating a vicious circle.

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