2012 - Off with a bang!

With the dawning of the new year, various forecasts of market professionals on what the investment world has to offer for 2012 began to appear. “On the back of mainly the European debt crisis, most of the expectations were for rather benign returns from e

The strong returns from equity markets during the first few weeks of 2012 surprised most professionals and were far better than any forecasters could have envisaged. The FTSE/JSE All Share Index delivered a total return of 6,9% from the beginning of the year up to 6 February and in this time surpassed the previous all-time high of 32232 achieved in May 2008.

“Most commentators seem to agree that the reason for the strong performance is the notion that perhaps markets were pricing in a worst-case scenario, which to date has not materialised,” says Marinus. “In addition to this it seems that developed world governments are putting measures in place (like the EFSF in Europe) to provide funding for difficult situations as and when they arise.”

The most important question at this point, however, is what should investors do now? If the All Share Index is set to make 12% for 2012 (as forecast by Deutsche Bank), then more than half of the expected return has been achieved in the first five weeks. Should equities be trimmed in the expectation of an inevitable breather by the equity market, or should forecasts be revised upward in the light of the new information available?

“Perhaps the question should be answered by looking at the alternatives to equities at a time in South Africa when inflation is above the upper limit of the target band,” says Marinus. “While it is tempting to simply bank equity profits, an environment of increasing inflation is not conducive to real returns by fixed-interest assets.”

He suggests that “a diversified approach based on risk tolerance remains the best approach.” This means no drastic asset allocation changes should be made at present.

“As equities rallied, the equity holding of a diversified portfolio would have increased relative to other asset classes. A sensible approach would be to bring this holding back to a neutral or sleep-at-night level,” says Marinus.

“This will mean banking a portion of the strong returns up to now, and the portfolio will once again be aligned with the investor’s risk profile. The portfolio will still have the attributes necessary to produce a real return over time.”

While the strong returns of the All Share Index to date have been very welcome, it remains important to remember that equity returns are not achieved in a straight line and that ups and downs in the market’s fortunes are to be expected.

“We believe volatility in equity prices will be with us for quite some time,” says Marinus. “However, investors who have a long-term time horizon and are seeking inflation-beating growth should not abandon their strategic asset allocation due to this volatility.”