Now comes the hard part
Where to put your money in 2007?
IF THE EASY MONEY has already been made, now comes the hard part: where to put your money in 2007? In a recent report for Equinox, Duncan Artus, portfolio manager at Allan Gray, argued that banks are a better bet than retailers – especially those with a high proportion of credit sales.
That’s because bank loans are backed by assets, which generate revenue in the form of fees and interest for between three and seven years – long after the slowdown comes. A retailer selling on credit earns gross profit from the sale of the product and interest from the credit extended to the buyer.
The difference here is that almost all the income is generated in the year the sale is made, with very little carry-over into later years. When the economic slowdown comes, banks are better positioned to collect on outstanding debts, which are secured by assets that can be resold. Credit retailers might be able
to repossess a suite of furniture but may have trouble selling it at a price sufficient to recover the outstanding loan amount.
Another factor in favour of banks is that manufacturing companies are currently operating close to capacity and will have to invest in new plant to meet demand. Much of that will come from the banks.
The trick going forward is to avoid buying overpriced assets, says Jeremy Gardiner, director at Investec Asset Management. Stock selection and diversification therefore become paramount. “Given that the JSE may well be fairly full at current levels now would therefore not be the time to put conservative investors into an index-linked product.
“However, for good stock-pickers opportunities certainly remain. Our recently reopened Value Fund is on a price:earnings of 12, with a dividend yield of 4%, which is by no means in dangerous territory. While there may well be a correction at some stage this year as long as assets aren’t in dangerous territory they should recover fairly quickly.”
There’s plenty talk about the possible collapse of the US housing market, which is expected to ripple across the globe. Not everyone agrees that the downturn in the US housing market will be as severe as some predict, though a slowdown is already priced into the US stock markets.
Investec sees a more benign scenario, where slower US consumption is ameliorated by a pick-up in spending by Asian and European consumers, leading to a global economy that slows but doesn’t stumble. That would see a stronger than expected US economy and global economy and a fairly stable US dollar.
Fund managers are more positive on equities than property and bonds, and technical analysts believe the top of the market hasn’t yet been reached. For all the optimism, many portfolio managers have taken out insurance – in the form of derivatives and options – in the event of a market downturn.
The situation in Iran has already spooked the oil market and could spread rapidly to other markets if it deteriorates. Options of 10% out of the money (away from current share prices) aren’t currently particularly expensive. Should any cracks appear in the market another hedging alternative is single stock futures, which already account for a large slice of trade transiting through the JSE.
Avoid buying overpriced
assets Jeremy Gardiner