Party-pooper may not end equity run

UNITED STATES SIGNALS AN END TO POLICY OF STIMULATING THE ECONOMY WITH ‘EASY MONEY’ The looming rise in US interest rates will disrupt the good times in financial markets around the world, this past quarter showed. But fund managers say you shouldn’t writ

Investors had a taste this past quarter of what could happen when the United States central bank “tapers off ” quantitative easing: the rally in global equities cooled, the demand for bonds fell, pushing up yields, and there was uncertainty on markets around the world.

Locally, investors in shares, bonds and listed property all experienced small losses after the markets were spooked by a suggestion from Ben Bernanke, chairman of the US Federal Reserve, that the bank may ease up on purchasing US bonds, as well as fears of slower economic growth in China.

To create money in the US banking system and keep interest rates low, the Federal Reserve has been buying bonds, which has increased the demand for bonds and lowered bond yields. This measure has stimulated the US economy.

Coronation, in its latest market commentaries, says the expectation that US interest rates will return to more normal levels resulted in government bond yields rising around the world and in investors moving capital out of emerging markets and back to traditional safe havens in developed markets.

Global equity markets as measured by the MSCI World Index rallied by six percent at the beginning of the second quarter, but the rally reversed in May, and the index ended the quarter down 0.07 percent in US dollars, according to ProfileData. The flight from emerging markets saw the MSCI Emerging Markets Index lose 9.14 percent in US dollars in the quarter to June 30.

Ryk de Klerk, executive director of PlexCrown Fund Ratings, says negative investor sentiment towards emerging markets also affected South Africa’s equity market, resulting in the FTSE/ JSE All Share Index ( Alsi) ending the quarter down by 7.1 percent in US dollars.

The depreciation of the rand, which boosted local shares that derive most of their earnings offshore, cushioned the blow for local investors: the Alsi ended the second quarter down by only minus 0.22 percent in rands.

Chris Freund, portfolio manager at Investec Asset Management, says the reaction to Bernanke’s tapering comments was overdone, because a reduction in monetary stimulus would signal a continued economic recovery in the US.

It was surprising that the markets sold off as viciously as they did before the recent recovery, he says.

At this stage, equities still seem to be the best asset class over the medium term, as the major alternatives – bonds and cash – offer, at best, average returns, Freund says.

Michael Hasenstab, co-director of Franklin Templeton’s international bond department, says although turns in the monetary policies of the major central banks will cause some “market dislocations”, the tapering off of “easy money” does not mean that the money supply will be tight. Instead, there will be a gradual rise in interest rates.

Franklin Templeton believes the revised policies will still provide a lot of liquidity to the rest of the world, he says.

FOREIGN SECTORS DO WELL

Despite the recent blip in foreign returns, South African investors who put their money into global or worldwide equity, asset allocation or real estate funds up to 18 months ago have earned handsome returns in rands. The latest quarterly unit trust data show average returns of more than 30 percent, and in some cases more than 40 percent, in these unit trust sub-categories.

The MSCI World Index returned 37.22 percent in rands over the year to the end of June. The depreciation of the rand by 15.46 percent to the US dollar assisted these returns, but even in US dollars, the MSCI returned a healthy 11.24 percent.

The recent volatility in global equity markets has not deterred many fund managers who are hedging their bets on this asset class to provide the best returns.

Coronation says that, as long as accommodating monetary policies continue, equities remain its preferred asset class, and the company favours global equities over domestic ones.

Global equities still have attractive valuations (measured in terms of price-to-earnings ratios, or PEs), and some of the world’s best companies are trading on compelling PEs while growing their earnings and dividends steadily, it says.

Coronation’s domestic balanced (or multi-asset) funds remain at the maximum permitted offshore limit of 25 percent, the company says.

Charles de Kock, manager of Coronation’s Balanced Defensive Fund, says a return to more normal interest rate policies will lead to rising bond yields in developed countries. These yields will spread to