Take everything into account

Jac Laubscher, group economist at Sanlam, looking at the local economy says that the local market is at the mercy of global international markets, and he warned policymakers that it was essential that they considered local and international issues.

It also seems that local investors are a little anxious about whether the local market growth is sustainable? Some investors are also scared that there may be a crash looming?

This is not likely says Laubscher. People can’t come to terms with the record breaking efforts for the JSE. Investors don’t trust all this good news.

Laubscher says that investors should re access risk tolerance, consider that equities are likely to continue to offer best returns, and perhaps its time to re-evaluate their offshore exposure.

In terms of a crash – or a sharp correction – there hasn’t been a localized sharp correction, in isolation, in the most recent past. There have always been international developments, explains Laubscher.

However Laubscher says that it’s not only investors who may be concerned.

Portfolio inflows are dependent on capital inflows, and the general population is also a little weary. The wealth effect of asset prices shouldn’t be underestimated. If there is a correction then the wealth effect will be affected.

Laubscher says that it wouldn’t be a waste of time if policy makers get into the mindset of asset managers.

When looking at the local economy and trying to explain the reasons for its behaviour and growth, some people would argue from a SA-only perspective.

The arguments include strong domestic growth; low inflation and its role in the repo rate; a commodity price boom and an improvement in the terms of trade; handsome yields and good prospective returns (the bond market), although most of the inflows have been on the equities side.

The fact is that SA equities have been re-rated over the last two years, when compared to the S&P. Locals have bought into the local is lekker argument.

When looking at the international perspective Laubscher says that policy makers have neglected the global picture.

Issues that should be taken into account include the end of the bull market in the dollar that came in 2000 – the commodity price boom could be due to the dollar weakness; while the rise in non-Japan Asia has supported the commodity boom.

On this score Laubscher warns that India and China could soon become producers of commodities and contribute to the supply side.

On the other hand developed market assets have become less attractive. The USA bond yield is a prime example, wallowing in the 4% region, from a high of 9%. Interestingly the local bond market is mirroring the US bond rate.

In terms of the S&P 500, valuations over the last four years have been re-rated downwards, substantially.

In terms of the structural improvements in emerging market economies – Laubscher says that one should look at the current account balances and one will see a healthy picture.

The flows are generally positive, although Africa is slightly negative, the financing of this debt is not overwhelming.

The emerging markets as an asset class has matured in the last few years, and although there will be normal corrections, it wont be significant. Laubscher says that the risk premium on emerging market debt is the lowest it has ever been. Although some pundits and foreign policymakers are saying that these rates are unrealistically low.

Laubscher acknowledges this but says that if there is a re-rating it won’t be to the levels that they historically pegged at.

Laubscher says that the local market is not grossly over-valued. In terms of the earnings growth of the JSE – it is topping out – although it would be in the region of 20%. So, while we won’t see the same performance as in the most recent past, it will still be sound.

He suggests that the two approaches should be overlain – local and international.

Historical perspective

Looking backwards, Laubscher says that between 2000 – 2003 cash was king. This was followed by he re-emergence of property as an asset class. Asset classes here increased from 1999, but between 2003 and 2005 property claimed new investors, and risk-taking became the order of the day, especially when compared to the equity markets.

People then got into the property market, at exactly the wrong time. Underlying all of this from 2000 investors have gone with local equities.

Portfolio investments have taken the place of unrecorded transactions. As of last week 65% of inflows has been attributed to portfolio investments.

The SA Reserve Bank says that they want to clean up this area – which still accounts for 35% of capital inflows. Laubscher also says that portfolio inflows also played role in the fluctuating rand dollar exchange rate, in the last couple of years.

Laubscher says that the trends between the amnesty on offshore investments and unrecorded transactions are too close to be unconnected. He does predict that this will return to some normality now, as the amnesty process has come to an end.