Forget the froth, investors should tread warily in the World Cup quarter – Absa Investments
LOOK past the froth of the World Cup feel-good effect. Irrational decisions taken during a potential period of exuberance could leave some South African investors on a hiding to nothing by the time of the June kick-off.
That’s the gist of the investment view on second quarter prospects from Absa Investments, the Absa Group’s investment and wealth management arm.
The company renowned for fundamental research to identify value investment opportunities says trends at the end of the first quarter indicate risks for both cautious and aggressive investors.
“It’s ironic,” says Craig Pheiffer, general manager, investments, at Absa Asset Management Private Clients. “The economy is growing, but so are the potential investor pitfalls.
“The domestic economy could achieve in excess of 3% growth this year and the World Cup effect will be good for many sectors. While the market has probably already priced World Cup upside into equities, any significant equity market exit in search of greater safety in other asset classes also raises concerns.
“Lose-lose scenarios are more evident than easy wins.”
Absa Investment analysts note that the JSE All Share Index rose 3.9% in the first quarter, generating a total 4.5% return – a big slice of the 10-15% equity gain forecast for the whole of 2010. Price-earnings ratios are up to 18 times, expensive territory.
“This is a hint equities may be due for a correction or a period of extended consolidation – hardly the moment for an aggressive equity play,” says Pheiffer.
At the same time, bonds, a solid income-provider and a defensive play by cautious investors, are hardly attractive given the current substantial government and parastatal funding requirements.
Bond prices benefited from the half a percentage point interest rate cut in late March and the All Bond Index returned a total of 4.45% in the first quarter, but the market consensus is that further cuts are unlikely and the next move will be up. So investors looking for capital growth are unlikely to find it in bonds.
This leaves safe, solid cash, but there’s downside even here.
Pheiffer explains: “The last rate cut took call rates down to 6.3%, though longer-dated money market rates are still above 7.00%. But factor in 5.7% inflation and a 40% marginal tax rate and you are looking at wealth erosion, not accumulation.”
Challenges in all local asset classes translate into a lot of head-scratching for wealth and investment companies.
Pheiffer advises: “In an environment such as this the investor should remain cautious and take a long-term view. To create wealth investors need to be in equities. But there’s no harm in taking off that top layer of cream where valuations are rich and gradually recommitting to equities with the focus on quality within pockets of value.”
