In or out, the multi-million rand question
If it still looks good, why the nervousness?
YOU CAN’T GET ENOUGH of a good thing. I’m not so sure that’s true anymore, judging by some of the questions I receive, including ones from readers of this column. After four glorious years of a rampant bull market there’s a distinct air of nervousness, even scepticism, concerning the market’s future performance.
In a way it’s encouraging. People who contact me certainly aren’t showing the classic euphoric greed that tends to accompany the top of a market cycle. But my readers are sophisticated investors.
Instead, I get a question I frankly can’t answer. Along the lines of: I rode out the 2000 market crash, have enjoyed four years where my money has quadrupled, it can’t go on, what do I do – get out of equities now and lock in profits?
Of course, much has to do with investment aims, time horizons, how diversified your portfolio is, etc. But the simple question – “Do I get out of or at least lower my exposure to equities now?” – remains the tough one.
So I defer the answer to Paul Hansen, director of retail investing at Stanlib. Hansen has been in the investment industry for a long time and, together with Stanlib economist Kevin Lings, presented a convincing argument last week as to why we should remain pretty confident concerning the market and underlying economy for the next five to seven years.
“We say the next five to seven years are a good story, though we fully acknowledge there will be more volatility. Overall, though, I can definitely be reasonably optimistic,” Hansen says.
But against that are the statistics-based arguments. Analysts crunch numbers based on the history of the JSE and caution about a reversion to the mean. Some quants analysts, using complex mathematics I don’t understand, present a convincing “probability argument” that the JSE can’t continue to deliver the returns of the past three years and even that a downturn is imminent.
Just one little statistic in the Stanlib presentation brought out the gambler in me and the instinctive view I take on odds at a casino table. For the past eight consecutive quarters the JSE’s all-share index has increased (including the second quarter of last year, when the mar- ket corrected in May) – the longest “winning streak” in 27 years. So black has come up eight times in a row. Surely there’s a strong chance it will be red next time?
But the market’s not a casino – though it surely looks like one at times. That’s where the counter argument comes in. I get wary when people talk about structural change, but on many levels there does seem to be just such a change in the economy and the market itself.
Foreign investment, both fixed and portfolio, has increased dramatically since the end of apartheid, there’s a burgeoning black middle class driving consumer spending and GDP growth at a rate many probably don’t realise, and the JSE is more friendly and efficient as a top emerging market stock exchange.
Things aren’t the way they used to be, so is it valid to compare the economy and market to the way it was in the past?
Hansen feels there’s a bit of truth in both arguments. “Looking at statistics it’s good to be a bit sceptical and sober about future performance. But when people talk about reversion to the mean, I have to ask what’s the mean? The market isn’t the same as before. I don’t think the current mean is what it was 10 years ago.”
So what would he tell investors considering getting out of the market now? “It’s not an ideal time now to come in with a lump sum investment. You have to take that longer view. There could be setbacks and volatility, but I don’t think we’ll see a bear market.
“For investors who’ve been in the market and are getting nervous now I’d say lift up your eyes, look to the next five to seven years and accept there will be volatility.”
However, Hansen adds that in certain cases, such as older investors, cash is a good parking place with the tax on interest exemptions.
There it is. The outlook for equities remains firm… but there’s no harm in taking some profits.
SOME OF THE KEY POINTS MADE ARE THAT:
Finance Minister Trevor Manuel says the average 5% GDP growth rate of the past three years should continue for the next three years. • The large capital-spending programme of Government and the private sector (R1 trillion expected from the private sector alone) will create more employment. • The 1,2m new jobs provided over the past three years is feeding into more consumer spending. • And therefore company earnings should
SA OUTPERFORMING IN $ (TO 10TH APRIL)Source: Bloomberg, JPMorgan
What’s the mean?