Biggest sentiment shift in a decade
A recent Merrill Lynch fund manager survey reveals the largest equity market sentiment shift in more than a decade. The question: “Are you bullish or bearish on South African equities on a 12-month view” solicited the weakest response since late 1998. At
A quick look at today’s global economy reveals problems on a similar (if not larger) scale. The main concern is that the US economy could slip into recession – with some analysts suggesting US super-states California and Florida are already there. Major US and European banks continue to struggle in the wake of the sub-prime disaster. Add to this the fact that European property looks certain to follow areas of the US into a full blow recession and you can appreciate why the JSE has shed more than 10% in the first two weeks of 2008.
We will have to pin our hopes on the domestic economy to see us through in the next 12 to 18 months. But we have problems of our own. Eskom’s supply concerns could impact heavily on future fixed direct investment while recent political developments might have international investors slightly worried.
Net equity bulls hovering at the 20% level
These concerns were evident in the survey results. Just over 20% of analysts polled were bullish on South African equities for the coming year. This compares with a ten year average closer to the 75% mark. It is interesting to note that the most positive outlook recorded by the Merrill Lynch survey was in 2001 when participants were often 100% bullish on South Africa’s prospects.
Forecasts for equity returns are disappointing. The majority (63% of the fund managers surveyed) believe that South African equities will return between 0% and 10% for the full year. Only 31% thought the market would perform better, estimating returns between 10% and 29%. And the balance indicated that they thought markets would be in negative territory in 2008.
Most of the analysts we’ve spoken to this year believe the market will provide a positive inflation beating return. With inflation at around 8% we suppose we should brace for full year returns of between 8% and 15% - with 15% on the optimistic side. And that’s a number closer to the long-term average return from SA listed equities.
Asset allocations remain fairly constant
As far as asset allocation is concerned, the global survey reveals that “Asset managers see little reason to change their preference for stocks.” A quick look at assets under management in South Africa’s collective investments industry (final quarter 2007) confirms that there has been little change in the ‘mix’ of funds here either. The survey found that “Investors are adamant that equities are fairly priced; that they are cheap relative to bonds; that corporate balance sheets are under-levered; and that company managements remain under enormous pressure to return cash to shareholders.”
So despite looming global concerns equities remain the favourite destination for funds under management. Of the 157 asset managers polled on equity weightings in a global mixed fund the majority of respondents indicated a level of 50% or above. The mean result from the survey was a level of 55%.
We expect equities to outperform cash and bonds again in 2008, though conservative fund managers with inflation plus targets will certainly have to work hard to honour their fund mandates. As far as property is concerned, we believe this sector will struggle in 2008, particularly if the housing recession in the US continues unabated. There are already definite indications that the property market in the UK is already tanking in sympathy.
Many sectors look undervalued
The survey also provided an interesting summary of which sectors are likely to benefit most in the coming year. Fund managers believe (globally) that Pharmaceutical, Energy and Telecoms stocks are serious undervalued as we enter the New Year. On the flipside of the coin, Utilities and Materials companies are overvalued. The banking and insurance sectors are slightly undervalued.
Local analysts point out that there is plenty of value in domestic shares. The problem is that these shares are unlikely to rebound until the global economic outlook improves. Retailers and banking stocks in particular will do well once the interest rate cycle turns. If, as many analysts expect, inflation is pegged toward the middle of this year, shares in these sectors should rebound.
Editor’s thoughts:
The global investment outlook is a great deal gloomier than in the preceding five years. Despite this it appears equities will continue to provide the best returns in 2008. What type of collective investment funds would you prefer your clients to be invested in for the next year or two? Add your comment at the end of this article, or send it to [email protected]
