Alternative asset classes
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?