Now comes the hard part

Where to put your money in 2007?

Finweek English Edition - - Asset management - COPY: Ciaran Ryan AD­VER­TIS­ING: Mar­ius Wilken

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

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