What to do now that the bear has reared its head

Finweek English Edition - - MONEY - BY SCHALK LOUW Port­fo­lio man­ager at PSG Wealth

Af­ter the lo­cal stock mar­ket’s his­tor­i­cal price-to-earn­ings ra­tio ( P/ E) had reached lev­els just short of 19.5 in April this year – and most ex­perts felt that the FTSE/ JSE All Share In­dex (Alsi) still had more than enough room for im­prove­ment – the mar­kets de­cided that this month was the time to bring the share prices in l ine with the ac­tual earn­ings of the un­der­ly­ing shares (see my anal­ogy in Fo­cus on the earn­ings, not the share prices, 9 April edi­tion). At the time of writ­ing, the mar­ket is down by 8% so far this Au­gust and down 13% since its all-time high in April, mak­ing it safe to say that we now of­fi­cially find our­selves in a cor­rec­tion.

One of t he st rongest tech­ni­cal in­di­ca­tors, the ‘Death Cross’ (50-day mov­ing av­er­age break­ing the 200-day mov­ing av­er­age and clos­ing be­low it), has since come about. In tech­ni­cal terms, this means that we have turned from a bull mar­ket to a bear mar­ket, which isn’t seen as a pos­i­tive sign for tech­ni­cal an­a­lysts and their fol­low­ers. The big ques­tion, how­ever, is whether this is merely an over­re­ac­tion, or per­haps an in­di­ca­tion of greater trou­bles to come.

I stil l feel that the mar­ket isn’t cheap and that it re­mains over­val­ued by ap­prox­i­mately 15%. Fol­low­ing the oc­cur­rence of the Death Cross, the mov­ing av­er­age of the weekly close over 200 weeks may be tested, which would cor­re­spond with the fair value lev­els (in terms of earn­ings per share) of be­tween 42 750 and 43 300 on the Alsi. Although the data and re­sults con­cern­ing emerg­ing mar­kets do not look very promis­ing, I don’t think it’s bad enough to be seen as a re­peat of the 2008 cor­rec­tion. I think it can be seen as more of a ‘ healthy’ cor­rec­tion, rather than a to­tal col­lapse. FTSE/JSE All Share In­dex and Fair Value

50 000

40 000

30 000

20 000

15 000

10 000

7 500

5 000

EPS Model “Fair Value”

FTSE/JSE Top40 In­dex

SOURCE: PSG Old Oak, INET BFA SO WHAT CAN WE DO IN THE EVENT OF THIS BE­ING A ‘HEALTHY COR­REC­TION’, WITH THE POS­SI­BIL­ITY OF HIT­TING EVEN LOWER LEV­ELS? 1.DEEP BREATHS Keep your emo­tions out of your in­vest­ments. If you bought shares within your par­tic­u­lar risk pro­file based on an ap­pre­ci­a­tion process that in­di­cated that these shares should pro­vide you with the ap­pro­pri­ate growth and earn­ings over the long term, you will just have to lie back, be pa­tient and breathe deeply.


diver­si­fi­ca­tion – not only across dif­fer­ent com­pa­nies and sec­tors, but also across dif­fer­ent as­set classes. War­ren Buf­fett men­tioned that in­vestors shouldn’t shy away from hid­ing in cash ev­ery now and then. I per­son­ally feel that neg­a­tive mar­kets present you with the per­fect op­por­tu­nity to en­sure that your port­fo­lio diver­si­fi­ca­tion is still in line with your risk pro­file.


FTSE/JSE All Share In­dex with 200-day and 50-day mov­ing av­er­age

60 000

50 000

45 000

40 000

35 000

30 000 FTSE/JSE All Share Inde 50-day mov­ing av­er­age

200-day mov­ing av­er­age

SOURCE: PSG Old Oak, INET BFA are start­ing to of­fer good value. Look for com­pa­nies that do not have ex­ces­sively high rat­ings, that pay high div­i­dends (which have been well main­tained over the long term) and do not have high debt lev­els. There prob­a­bly isn’t such a thing as a ‘good cor­rec­tion’, but the fact re­mains that a cor­rec­tion is as much a part of the stock mar­ket as but­ter goes with bread. As such, use this cor­rec­tion to get your port­fo­lio back in line and to en­sure that it re­mains ‘healthy’.


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