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

Weekend Argus (Saturday Edition) - - GOODPOSTER -

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.


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

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