In or out, the multi-mil­lion rand ques­tion

If it still looks good, why the ner­vous­ness?

Finweek English Edition - - Creating wealth - BY SHAUN HAR­RIS shaunh@fin­

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.


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

re­main buoy­ant.


Source: Bloomberg, JPMor­gan

What’s the mean?

Paul Hansen

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