By Staff Reporter
WINDHOEK
Over the past four and a half years portfolio managers have had a whole lot more fun than the previous depressing period, during which equities had delivered average returns of 1% for five years in an 8% inflation environment.
Since then, equity returned an astounding 41% per year, compared to the 10% per annum return of bonds and 8% from cash.
“The two main drivers were the extremely cheap starting point for equities as well as the robust company earnings growth resulting from strong global and local economic growth,” says Chris Freund, portfolio manager of the Investec Balanced Fund, currently ranked first in the Alexander Forbes Large Manager Watch over one month, three months, six months, a year and three years.
Even better, he added, these returns have been coming through fairly regularly.
“Volatility in the SA equity market has fallen from the traditional 20% level to a more calming 14%.”
With the long-term history pointing to negative equity returns on average one in every four years, is it time to take the equity chips off the table?
“Despite the massive share price increases, they are generally not expensive,” says Freund.
Some may argue that earnings are at unsustainably high levels.
“In certain sectors this is possibly true, but overall we consider that earnings growth will continue at relatively healthy levels into the future. Global and SA economic growth is set to slow, but not collapse. Within SA the mix of growth is also changing, with the growth baton being handed over from the slowing consumer to the accelerating infrastructure sector.”
Especially with regards to construction shares that leverage off this infrastructure growth, the concept of normalised earnings is a vexed one, says Freund.
“Infrastructure growth is likely to be longer and stronger than most believe. Eskom and Transnet are talking about 15 to 20-year infrastructure cycles. And while the forward PEs of roughly 16 to 18 times are not cheap, it is not inconceivable that earnings continue to surprise everyone on the upside.”
The central question in financial markets is whether or the US economy will slip into recession. “No-one knows the answer yet,” he says.
“It’s hard to imagine that the world’s largest economy going into recession would not unsettle equity markets or at the very least commodity prices.”
The good news is that globally there is not really an inflation problem. “High food and oil prices have yet to mutate into higher generalised inflation, thus central banks around the world have room to lower interest rates in response to slowing economies. Equity markets love lower interest rates.”
Freund concedes that South Africa does have an inflation problem, but that it should start falling by the last quarter of 2008 and so interest rates.
“Bonds, bank and property shares should all appreciate the first hint of lower interest rates in time to come.”
He believes it is too early to aggressively lower equity weightings: “Rather focus more on what type of equity you should have. Sector selection will be key. The smooth sailing we have had over the past period is likely to get a little rougher.”