Confused? You're following the wrong investment trends, says STANLIB
IF you're a confused investor it's probably because youre following the wrong investment trends, says STANLIB, the country's largest unit trust company and an asset manager with four equity funds in the top 20 rankings in the first half of 2007.
The problem for the typical saver-investor is that old linkages no longer apply to the same extent, says Paul Hansen, STANLIB's retail investing director.
Years ago, when interest rates were going up, the JSE was going to stall or fall. These days, that simplistic linkage doesnt quite hold. A month after the latest 0,5% rate rise, the JSE was at record highs near the 30 000 point-mark.
Bond yields are sharply higher, up from 7,6% to 8,4% on government's 10-year bond a leap that would have caused jitters a few years ago as analysts use this benchmark to calculate the present value of shares and higher yields torpedo present values.
Says Hansen: "In a year, interest rates are up 2,5%. The JSE has powered ahead over this period. Obviously, local rate rises dont smack local equities to the old extent.
"Ten years ago, the braking effect would have been marked."
What's changed?
Two key changes involve commodities and rate cycles.
A decade ago, global commodities were in the doldrums. More recently, resources have taken off thanks to huge demand in India and China. The JSE's mining sector is up 36% so far in 2007, underpinning JSE growth.
Ten years back, inflation was much higher. When rates rose, the leap was substantial. The long-term average in a South African interest rate up-trend is 6%. So, in the late 90s the expectation after a 2,5% rise would have been that we still had 3,5% to go a big worry for any equity market.
The current up-trend might continue, but it would be a major shock if rates rose another 350 basis points, while some market-watchers (STANLIB included) believe the current cycle may have run its course.
Hansen explains: "The world commodity boom obviously won't be derailed by local rate rises, and the historic average of 6% for an interest rate up-run no longer looks credible as inflation is much better controlled.
"Another factor that tends to override some interest rate concerns is positive emerging market sentiment. The MSCI Emerging market index of which South Africa forms a part is up 22% this year. Thats way ahead of the MSCI world index rise of 9,5%."
So, if you reduced your equity positions on bad news about rates and bond yields, does this mean you are totally out of date?
"Not exactly," says Hansen, "the last rate rise and worries about the National Credit Act caused banking shares to retreat 13% for a time. Well-diversified equity investors were little affected. Those taking a strategic view have been well invested in infrastructure stocks for some time as long-term national strategy supports the category. The JSE's construction sector is up 59% so far this year so long-term policy direction must also be considered.
"You can't ignore interest rates, but other variables are also important. Investors should also consider emerging market sentiment, resources and long-term inflation. Don't watch just one indicator follow the lot."
