Equities still attractive despite cyclical worries
The only two things that we are certain of in this world are death and taxes. If you want certainty, definitely do not look towards the stock market. Stock markets are cyclical in nature, but to get the right basket of shares in your portfolio to achieve maximal growth is becoming somewhat of a challenge
It seems that despite the recent global economic challenges, South African investors have been able to offer their clients return which are outperforming any expectations that one would expect from the market.
This has been one of the true success stories following the 2009 financial crisis (the financial crisis), most of the world's emerging markets were largely protected by the full effects of the crisis, and the result is that their growth is far outstripping that of developed markets. Because of this, Sanlam Private Investments (SPI) CEO Daniël Kriel says, that the market has experienced pronounced tailwinds, which has seen investment companies offer exceptional returns.
"Just looking at the performance of SPI, in 2012 the company was able to offer its clients with returns of 27%. This decreased slightly in 2013 where we were only able to offer growth of 21.43%, but it still outperformed the market. Between 4 January 2009 and 5 January 2014, SPI was able to offer an average return of 19.53%,” says Kriel.
Hunting for gems in a world of possibility
While the South African market is experiencing this upswing, investors will want to look for opportunities to maintain this momentum. SPI Director Alwyn van der Merwe says that equities still offer a lot of potential.
"As an asset class, equities in South Africa are certainly on the expensive side in terms of their own history. Although we are not in bubble territory yet, the market is currently trading at a price-earnings multiple of 17 – it seldom trades at these high levels. However, within any basket, one will always find assets that are attractive. The trick is to find those shares that are cheap and sell those that become too expensive,” he says.
Van der Merwe says SPI has, over the past year, started migrating from ‘cut diamond' shares – shares with a strong profit record but which are expensive – to ‘rough diamonds' trading at low levels and which have less certainty in terms of future profits.
"Our focus on price has certainly paid off. The rough diamonds we have invested in, such as BHP Billiton, Steinhoff and Wilson Bayly Holmes, which have gone up by more than 38% over the past year, compared to cut diamonds such as Shoprite, SAB and BAT which, as a basket, went up by only 6.8%.”
# Fear of missing out
While lingo such as Yolo (you only live once) and lol (laugh out loud) is more common with teenagers who spend the majority of their lives throwing these acronyms around social media sites, Van Der Merwe feels that Fomo (Fear of missing out) is an acronym which will not be out of place in the investment community.
The objective of investors is to get the best performing stocks at the cheapest price possible. This however has become a unicorn in the market as top performing shares always come at a premium. Because of the recent global economic turmoil, and the recent local human resources fiasco, mining shares are currently being viewed as the lepers of the investment market. However, buying these shares now may pay off in the long run.
"Although mining shares are unloved at the moment, we think their valuation is quite attractive. Relative to industrials, mining shares are now trading at levels last seen in 1998. The timing on these rough diamonds is always difficult, but we have started to add mining shares in a responsible way.”
We need to look a bit deeper into why SPI is taking this view. Before the financial crisis, China was displaying an insatiable appetite for resources as it was in the middle of executing an ambitious infrastructure build programme. This obviously slowed during the financial crisis, but is showing signs of slowly gaining momentum.
There is also a small matter of significant oil and gas discoveries off the coast of East Africa, which is a largely under developed region. Construction companies and resource companies are starting to make their presence felt in the region and will be building capacity to take advantage of the resources on offer.
With regards to other asset classes, Van der Merwe says it may be prudent to increase cash levels given the risks currently associated with financial markets worldwide. "Our main exposure remains equities, but as a short-term strategy we have recalibrated our asset allocation to include some cash. The equity market is always volatile and may correct itself within the next five years. Having cash increases optionality to buy back assets at better prices compared to their prices when the market is expensive.”
Don't become the markets worst enemy
While this would be an opportune time to purchase resource based shares, there is a risk of asset managers becoming the markets worst enemy as over interest would create a speculate bubble.
Professor of economics at Yale University, Robert Shiller, defines a speculative bubble as a social epidemic where the congestion is mediated by price movements. Van Der Merwe points out that one of the ways in which a asset bubble is classified is that it is a thematic bubble, which occurs when a particular asset or sector becomes fashionable.
However, when this bubble bursts, we could find the market being moved closer towards crisis mode, which was the case with the US market when the sub-prime issue led to the financial crisis.
And when this bubble bursts, where will asset managers find themselves? Kriel warns that the tailwinds which the market has been experiencing over the past few years have largely dissipated.
"SPI does not expect any market tailwinds during 2014. There will be limited investment opportunities, and a tightening regulatory environment means that financial reporting is becoming a major headache for asset managers,” says Kriel. This is a clear indication that the market is looking very passive for the rest of the year.
Editor's Thoughts:
While the market has been largely positive over the past few years, asset managers will need to find value in assets which would give their clients value for their money. Van Der Merwe points out that this is a perfect time for diversification where asset managers are not putting all of their eggs into one basket. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
