Alternative as­set classes

Finweek English Edition - - INVESTMENT -

Now is not a good time to write an ar t ic l e on stock- as­set picks. There are not many op­por­tu­ni­ties out there. The main rea­son is that eq­uity has given such ex­cel­lent re­turns re­cently. It is al­ways un­der th­ese cir­cum­stances that ev­ery­one is very bullish and starts pil­ing back into the mar­ket. So where to start? Maybe it is best to start by list­ing which shares or as­set classes to be cau­tious of, rather than giv­ing ac­tual top picks. So what must we be wary of? LONG BONDS – LO­CAL AND WORLD­WIDE Devel­oped world bond yields have been ris­ing (cap­i­tal loss for in­vestors) over the last few months. This is quite nor­mal as the world econ­omy con­tin­ues to im­prove. The long bond in the US has risen from a low of 1.4% in July last year to the cur­rent level of 2%. Prior to the world fi­nan­cial cri­sis, I would have thought that a “nor­malised” yield level would be around 4.5%. Given cur­rent growth and in­fla­tion ex­pec­ta­tions, the level is prob­a­bly around 3.2%. This is still sig­nif­i­cantly higher than the cur­rent level, so cau­tion is ad­vised.

I can­not un­der­stand how SA long bonds have re­mained around the 7% level for the last nine months. While lo­cal po­lit­i­cal de­vel­op­ments have not helped, the main rea­sons are:

Global con­di­tions have im­proved. This makes SA less at­trac­tive on a rel­a­tive ba­sis for cap­i­tal port­fo­lio f lows.

The SA cur­rent ac­count deficit is our Achilles heel, com­pounded by the Government fis­cal deficit. The only com­pen­sat­ing fac­tor is the rand. Just to add fuel to the fire, higher inf la­tion is vir­tu­ally guar­an­teed over the bal­ance of the year.

Our bond yield should be at least 1.5% higher than the cur­rent level. I did not ex­pect rand weak­ness this year, but it is def­i­nitely on its way. The cur­rent weak­ness (mas­sive and quick) is how­ever over­done. The rand could strengthen in the short term (six months), but we have seen the best. The rand must be struc­turally weak over time. In­cluded un­der this lowyield ban­ner are domestic listed prop­erty shares. Yields cur­rently do not of­fer good long-term value. DOMESTIC CON­SUMER SHARES Th­ese shares were the dar­lings over the past three years, but cir­cum­stances are chang­ing rapidly. Domestic con­sumer ex­pen­di­ture is coming un­der pres­sure. Un­se­cured credit is de­clin­ing rapidly, growth in Government jobs and grants are fi­nally slow­ing down. While quite a few Grindrod com­pa­nies ship­ping have op­er­a­tion given back in Namibia most of their gains, val­u­a­tions are still high. Bank shares, while in the same cat­e­gory, never at­tained the same lofty val­u­a­tion lev­els as some of the re­tail shares and are still rea­son­ably val­ued. WHAT CAN YOU BUY? Quite frankly, op­por­tu­ni­ties for now re­main few and far be­tween. Global devel­oped eq­uity mar­kets are rea­son­ably val­ued, but as I ex­pect the rand to strengthen in the short term, now is not the time to take money off­shore. Lo­cal com­mod­ity shares (ex­clud­ing Gold) do of­fer value, but they are volatile. Sa­sol in par­tic­u­lar, de­spite the re­cent run, stands out. Bid­vest is still a high-qual­ity com­pany at a rea­son­able price. All life in­sur­ers, Vo­da­com and MTN (with some risks at­tached) of­fer a very high div­i­dend yield. Maybe you can look at a few “spe­cial cir­cum­stances” like Rain­bow and Grindrod?

Maybe now is a rea­son­able time to take some money off the ta­ble?


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