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Not too late for equities - and offshore may be key

27 July 2009 Sanlam Private Investments (SPI)

Now that the equity markets have shown some signs of recovery - following a drop in asset prices due to the global credit crunch - the question on the lips of investors may be whether or not they have missed the equities boat. Alwyn van der Merwe, director of investments at Sanlam Private Investments (SPI), believes it is not too late to increase exposure to equities and that now is an opportune time to look beyond South African borders.

Speaking recently at an event in Johannesburg for some of South Africa’s wealthiest black investors, Van der Merwe said, “Though equity markets have already shown some improvement there will be further strong recovery. This means investors now have a window of opportunity to build a portfolio of shares that provides a high dividend yield. Currently the high yielders are Kumba, Brait, Grindrod, PPC, Metropolitan, Illiad, Oceana, Reunert, Hudaco and ABIL.”

History proves risky assets pay off following collapses. Each time after markets bottomed out there was a strong recovery over the 18 months that followed.

He suggested that investors increase their exposure to cyclical stocks, and maintain defensive stocks, the stalwarts, in their portfolios. Defensive shares can be considered the stalwarts or the safer option, but cyclical stocks provide rewards when the cycle turns

“Business leaders tend to prefer the certainty of defensive shares, whereas top down analysts suggest cyclical financial and industrial share exposure,” he explains. Locally, there are very limited signs of a recovery in business activity. Hence, many investors find it hard to pin their hope on a recovery in business activity despite the fact that we have already seen significantly lower local interest rates.

“Cyclical stocks include commodity shares, durable goods retailers, small caps and cyclical industrials and defensive stocks include tobacco, breweries, food producers and service companies,” he said.

According to Van der Merwe, South African investors typically look to South African equity markets for investment opportunities, but he urges investors to broaden their view. Generally the US is a proxy for international equity markets, and according to Van der Merwe, is one of many examples of a market that can offer South African investors good value.

“The time is finally right to start looking beyond South African shores as there are many good opportunities to be found.

“Developed markets are experiencing an exceptionally slow recovery. The US housing wealth, as a case in point, is at levels last seen in the 1950s and US inflation is nearly two percent higher that the pre-crisis trend. The market is not expensive and, judging from the company results coming out of the States, as well as the earning performances, it could hold many good investment opportunities.

“The US is certainly not a unique case. In fact, we expect a wide spread earnings recovery with emerging markets, in particular, reflecting improved growth prospects. Investors have a window of opportunity to invest in equities now and shouldn’t be afraid to look further than SA borders,” he concludes.

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