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Equities take off as the West shakes off its woes

01 November 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

27 October 2011 was a big day for the JSE All Share index. After sweating through months of unprecedented market volatility the country’s large cap shares finally showed signs of life. The index surged 716 points to close at 32, 453 after languishing at 2

Does this mean the global economic woes are a thing of the past? The improved US GDP number coupled with steps taken by the European Union to address the region’s sovereign debt crisis suggest the threat of a second round recession can finally be put to bed. And that means investors will have more appetite for risky assets such as developed and emerging market equities. A week prior to this remarkable one-day rally Absa Asset Managers (AAM) Private Clients presented their Q3 2011 economic outlook. We perused their presentation to find out what they believe the next 12 months hold.

A mixed bag from domestic asset classes through Q3 2011

Craig Pheiffer, General Manager: Investments, at AAM Private Clients said the domestic market had delivered a mixed bag year to date 30 September. Equities were down, the rand was stronger against the US dollar, local bonds had improved and many resources (copper was used as an example) have shed significant value. Investors were taking their risk capital off the table and sheltering in “safe” assets such as cash, currencies and gold. The reasons for these sluggish performances are well documented and we touched on two of them in the opening paragraphs. Pheiffer was at pains to expand on the Euro-zone crisis and offered up what he believed would be a lasting solution.

The core requirement of any Europe-wide solution is for the member countries of the European Union (EU) to work towards a common goal. “We need a new EU framework for providing finance to member countries at reasonable rates,” observed Pheiffer, before listing a range of fiscal remedies that would restore both sovereign finances and investor confidence. Five days after his presentation EU leaders finally agreed a plan of attack. They increased the bailout funds in the European Financial Stability Facility (EFSF) to €1 trillion, agreed to write off half of Greece’s debt and committed to recapitalising European banks! After months of inaction it seems the region could finally return to some form of normalcy. Global markets (South Africa included) strengthened on the news – and then went through the roof on the US GDP number!

Putting the microscope on South Africa

Chris Gilmour, Investment Analyst at AAM Private Clients was concerned about possible “double top” technical pattern exhibiting on the JSE All Share index. Were this formation was confirmed, the market could well collapse in a heap. He also lamented the unimpressive 4% return generated year-to-date (10% after the latest rally) by local equities. Despite these negative opening remarks Gilmour said equities, both locally and abroad, were finally moving back into cheap territory. And the average price-to-earnings ratio of the All Share index is finally below its long-term average again.

Going into Q4 2011 the AAM Private Clients asset class view is neutral (at weight) equities and underweight bonds. The group likes preference share for the extra yield they offer and was quite happy with listed property for the growth and yield. Spare cash should be held in money market “parking bays” to avail of equity opportunities as they arise. Smart investment strategies will deliver the goods despite sluggish equity markets. According to Gilmour resource shares were ate extremely attractive levels (as borne out by the spectacular one day price hikes mentioned in our opening paragraph). In contrast financial shares looked under pressure, while investors would need strong stock picking skills to make money in the industrial sector.

Although there is no compelling reason to be overweight offshore equities there are plenty of “cheap” shares for so-called value investors. Gilmour likes large US and UK shares including Pfizer, Microsoft, Cisco, Coca Cola, Johnson and Johnson and Tesco.

Local investor decisions hinge on current equity positions

South Africa’s long-term savers fall largely into two camps. In one camp we have those who stuck with their equity positions through the market turmoil and in the other those who reduced their equity weightings and “rested up” in cash and money market accounts. “The danger after JSE equity losses in the third quarter of 2011 is that nervous investors will run down their equity positions and realise losses,” said Pheiffer. They should rather sit tight and wait for the inevitable market recovery.

Those in the second camp might benefit from sprucing up their asset allocations in time for summer… “The nervous investor who long ago moved into cash and bonds has done relatively well of late,” he said. “But this category of investor could run some lost opportunity risks if they stay in cash for an extended period.” Since equities deliver the best real returns over long periods it makes sense to maintain a higher weighting to the asset class rather than languishing in bonds and cash.

Editor’s thoughts: Stock markets do funny things during times of uncertainty. The JSE All Share index has rebounded 14% in the 10 weeks since its 8 August 2011 close at 28, 391 points. As investors become more certain of events in the US and Europe, we look forward to an improved performance from locally listed equities. Do you think the Euro-zone sovereign debt crisis has been adequately addressed, or will additional concerns creep in? Please add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Irene, 02 Nov 2011
Funny how quickly things can turn with the tanking of the markets 1 Nov on Greece's about turn on its commitments to the Eurozone leaders. It just goes to show that in the end politicians look after their own survival before owning up to the electorate on the sorry truths about their failures. Some two years ago following one of your articles a while after the financial crisis in 2008 I opined that things will get much worse before they will get better and that this will unfortunately take a loooong time coming. At the moment the speculators and market manipulators - mainly in the USA - are diverting attention and concentrating their efforts on Europe, but is is just a question of time before everybody realizes that the USA is also bankrupt and their financial sector has been operating the biggest Ponzi scheme er - Bernie Madorff was just the tip of the iceberg. For many years the manipulaters have determined share prices to suit their agenda instead of prices being based on fundamentals. Pity anybody that therefor remains in the markets with the hope that things will get better soon. I rather hang on to cash than entrusting my saving to somebody else all to ready and eager to gamble with other peoples money and then say 'Oh, but that's how the free market operates and it comes with risk'.
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Added by jo, 01 Nov 2011
Someone wrote: “The world still hasn’t dealt with many of the problems that caused the financial crisis in the first place. Many banks in the US and Europe continue to hold loan books filled with mortgages on houses that are now worth less than the outstanding loan balances and other similar junk assets. This is a major source of potential weakness and fragility, particularly since the IMF estimates that banks worldwide will face a $3.6tn “wall of maturing debt” over the next two years.” This still applies. Nothings changed. New York Times reports today: Major equity indexes fell 2% or more, sending the broader market in the US back into negative territory for the year. Major indexes in Europe fell about 3%. … Standard & Poor’s 500-stock index fell 31.79 points, or 2.47%, to 1,253.30. …Dow Jones industrial average fell 276.10, or 2.26%, to 11,955.01 and the Nasdaq composite index was down 52.74 points, or 1.93%, at 2,684.41. …S&P. was down 0.35% for the year after Monday’s declines, while the Dow was up more than 3% and the Nasdaq 1
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