Opportune time to add more risk?

Marize Pieters, Investment Analyst, Glacier by Sanlam

With the first interest rate cuts still fresh in our memories we can but wonder if it’s the opportune time to add more equity to your portfolio given the traditional principle that interest rates drive the business cycle; the business cycle company earnings and company earnings share prices.

The million dollar question is; “Where to from here?” Recent economic data indicates a weaker domestic economy than originally anticipated. Domestic inflation peaked in August at 13.7% y/y, but has since dropped to 8.6% y/y as the main drivers of inflation begin to unwind. This together with the expected spillover effect from a mounting global recession certainly bodes well for further domestic interest rate cuts in 2009. Central banks across the globe have aggressively cut interest rates, some to the lowest levels since the establishment of the banking system in the US, in an attempt to stimulate economies.

The domestic bond market certainly seems to be discounting a series of interest rate cuts in 2009, with the yield curve shifting downwards. An investor should therefore expect the yield on bond and money market funds to consistently decrease in line with interest rate cuts.

Historically, equities have always outperformed cash in a declining interest rate environment. According to history now would be the time to add more risk to your portfolio. The question however remains: Will history repeat itself again or is it going to be a different story this time round?

One can definitely not answer this with certainty. However it seems that the majority of asset managers are slowly switching out of cash and buying quality stock at discounted prices at opportune moments. Some even went as far as completely selling out of their hedged equity positions during the end of 2008.

There is definitely value to be found in the equity markets, but one should expect volatility to persist for a while still. The patient and disciplined investor will definitely be rewarded in the long term. Remember, equity markets generally tend to anticipate the end of a recession several months before the economy starts recovering.