By Mbatjiua Ngavirue
WINDHOEK
The present bull market in equities will at some point end, but no one can say precisely when it would come to an end says Pieter Davis, a Director of Namibia Asset Management and Head of Institutional and Private Client Service at Coronation Fund Management in Cape Town.
Davis said in the last three years, the South African stock market rose more than three times in real terms, on the back of longest economic expansion in South African history, starting in 1999.
Low interest rates, steep company earning increases and increased buying of South African stocks by foreign buyers underpinned the three-year bull market.
Davis was speaking at an information session hosted by Namibia Asset Management (NAM) and Coronation Fund Managers (CFM) for clients and prospective clients last week.
Looking ahead, he highlighted several risk factors including the slowing US economy, vulnerability of emerging market economies, including South Africa, to possible international political instability.
Although South African markets benefited from big buying by foreign buyers, this also increased volatility in the market.
He said in the last three years, investors have made a great deal of money, almost irrespective of the sectors or the companies in which they invested.
Going forward however, investors would have to choose where to invest their money with far greater caution.
Davis added that although it is not possible to predict when the bull market will end, warning lights were already flickering.
The price/earnings (PE) of companies normally moved in a band ranging between 10 and 15 times and the price of shares is now at the upper end of that band.
He pointed out that history shows investors also receive low returns when the initial price for equities is high.
According to Davis, company profitability is at an all-time high; there are imbalances in the global economy with ever-present political risks.
Company profitability is at a 24-year high with operating margins among companies on the industrial index hovering a around 13 per cent.
He emphasised that the US economy is slowing – a trend he expects to continue – and the US reporting season will be the weakest in some years.
Although Europe is growing nicely, he added, it is not immune to a US slowdown.
Furthermore, European and US monetary policy are unlikely to ease soon, as some believe, because of excess liquidity. On the positive side, China’s relentless drive would continue contributing to economic activity – particularly commodities markets – while there could be a soft landing for the US economy.
Davis also said South African interest rates may have peaked, while the countries ASGISA programme and infrastructure drive would boost economic activity.
His assessment is that there is still massive interest in emerging markets and that overall global equities are not expensive.
He stressed that over the long-term equities and bonds outperform all other asset classes.
“Our assessment of risk in the short-term however is negative, so we will be shifting into safer asset classes, such as cash,” Davis noted.
The returns on cash holdings are currently 9.5 per cent, which made it a good asset class at this stage.
Having said this, Davis again reiterated that equities are still the most attractive domestic asset class.
He further predicted that the R/N$ currency would weaken over the long-term. In addition, he cautioned that investment opportunities would decrease as private equity deals remove more and more companies from the JSX.
“Returns will be lower than we have come to expect, but there are still some attractive investments available,” he said.