With our local markets reaching new highs many investors are understandably asking whether or not this is a good time to invest a lump sum.
Following global markets
Firstly markets are a lot like a herd of sheep – they tend to follow each other. Globally we have seen a recovery in global markets since the beginning of the year, reversing the losses we saw in the second half of 2014. The recovery is mostly coming from the Far East and from Europe.
Japan, after years of going nowhere slowly, has picked up sharply and is leading the recovery in developed markets. Some of this strength can be attributed to Japanese pension funds, which are increasing their exposure to equities in order to increase returns. Investors are also looking toward an economic revival in the economy as well as in company earnings and an improvement in the attitude towards shareholders.
Europe is also finding its feet after a weak 2014. The only weak link at this stage is the US market as investors worry that the strong US dollar will affect earnings as US companies becomes less competitive.
China leads the way
China, which dominates the emerging markets at 23% of the MSCI Emerging Market index, is up a massive 100% over the last year, even in US dollar terms.
Until recently, Chinese investors were only allowed to invest in companies listed on the Shanghai market while foreigners were investing in the same companies, but listed in Hong Kong on the Hang Seng. As a result, the exact same company was trading at a significant discount in China. Now that the HK market has been opened more to mainland Chinese investors, the Chinese-listed companies have risen dramatically, closing their discount to the Hang Seng prices to around 20%, resulting in the rapid share price move.
Despite this meteoric rise, China’s stock market is not in a bubble phase and still showing value, unlike its property market valuations, which are becoming concerning in terms of a potential bubble.
The concern is that the emerging market recovery may be more of a dead cat bounce than a real recovery as many emerging market economies continue to struggle, especially Brazil and Russia. Remember, like South Africa, these emerging markets rely heavily on commodity exports, so as long as commodity prices remain subdued these economies will fail to ignite. The only exception is India, which is growing strongly and is less dependent on the resources cycle.
Mixed view on SASo, coming back to our markets – fund managers are concerned that JSE-listed companies are looking expensive, especially when compared to developed markets.
The opposing view is that among emerging markets, South Africa remains one of the favoured destinations for investors. Foreign fund managers are generally very impressed with South Africa’s companies which remain well managed and provide an excellent dividend yield and impressive profitability ratio in return on equity. For example, a foreign pension fund could be sitting in safe German government bonds earning 0.11% interest or they could be buying Foschini’s in South Africa and earning 3% in dividends. The rand has been very weak this year, but it is starting to recover. Foreign buyers could therefore continue to keep South African company valuations high.
To confound the argument even further, it is also worth noting that there has not been a market correction of more than 10% in the US in the last 3.5 years. Historically, we see this type of correction every two years so one could argue that the US is due for a correction. Throw into that argument that the period from May to September is historically a weak period for the markets (hence the saying: “Sell in May and go away come back on St Legers Day”) and there is a good argument that we could see a major market correction sooner rather than later.
Investment strategy in uncertain times
So given this very mixed bag of information, how should one be approaching your portfolio?
As a general rule, trying to time the markets by guessing its highs and lows usually only ends in tears and one should rather be focusing on one’s own investment time frame. If you have less than five years to invest in the market you want to go for low risk, low equity exposure – if, however, you have a 20-year horizon, what happens over the next year will have very little impact on your total return over that period.
As a long-term investor who is concerned about the current market conditions, rather than sitting in cash and possibly missing out on further market growth, use the range of risk-profiled funds offered by Stanlib and Liberty, especially those that can offer some offshore exposure.
An investor who typically would have a more aggressive investment portfolio could, for example, invest in a moderate conservative fund with a 38% exposure to equities. Should we see a market correction and the market offers more value, there would be the opportunity to move into a more aggressive fund.
Investors with a shorter time horizon could invest in conservative funds with low or no equity exposure.