No more easy money

According to Wayne McCurrie, chief investment strategist at Advantage Asset Managers, the 100% plus rally since May 2003 has eliminated any under-valuation that existed then, and we believe that the local equity market is now reasonably valued, but defini

It is very important for investors to realise that we are not saying that the market is expensive and you must sell. Simply our view is that the really easy money has been made and investors must not expect another major rise from this level.

While a reasonable return is possible from this level, probably higher than cash, in our opinion if the domestic equity market rises more than 10% in the next six months, it would not represent fair value.

In other words, now that the market has risen to the +- 15 200 level, we are selling any overweight position that we have in the portfolios, and even possibly going underweight, should the market continue to rise.

Irrespective of the last 24 months of very good equity performance, investors must be aware that this good performance is highly unlikely to repeat over the next year.

The only material threat to the local equity market, at current valuation levels, is sustained material Rand strength. While difficult to estimate the rate at which any potential Rand strength will negatively affect our equity market, we believe that if the Rand goes back to the R6.00 / 1US$ for a sustained period, the share market will fall substantially, especially resource and export related shares.

Other sectors such as financials are in fact still reasonable value.

The recent Rand weakness has definitely removed any excess overvaluation and the Rand is now approaching a more reasonable value, but is still slightly expensive.

The earnings outlook for financial and other consumer related shares looks very good, while the outlook for resources, at the current Rand exchange rate, is improving.

Our share market probably still represents the best opportunity that we can find.

While the potential for gains is significantly smaller than in May 2003, other assets / markets do not represent better value. Once again we caution investors that the recent (and maybe continuing) market rally could be a bull market and as such will, in most likelihood, entice investors in at, or near, the top.

Now how much more can we expect from the local equity market?

Probably the best way of answering this question is to do some analysis about what would be an expensive level, when you would definitely sell shares, and then compare this to the current level.

Based on our best view forecast, we believe that the equity market would be expensive and investors should sell, if the market rises to the 18 000 level in the next year.

This would then be a structurally overvalued market and the risk for a serious fall would be high. For sake of completeness, we believe that the fair value level for the market in the next year is about 15000.