SA Investment Market Still Equity Friendly

By Eddyson Lugangwa Posted 13 April 2006 @ 04:16 pm EET     Print     Reprint     E-Mail     Comments

Nairobi (IBTimes.com) - Despite a phenomenal first quarter, which saw the JSE's all share index surge 13 percent, the market's bull run shows no sign of abating. However, this should not come as a surprise, as the current environment continues to favour equities.

This is the view of Investec Asset Management (IAM) director Jeremy Gardiner who says that while several players had been calling for an end to the equity run for some time, IAM believed that barring an abnormal event such as an emerging market meltdown '98, a technology collapse, or 9/11, markets should be reasonably stable going forward.

"Certainly, there are clouds on the horizon - geo-politics, oil, a dodgy US dollar and bird flu to mention a few! However, in the absence of the aforementioned abnormal event, these clouds shouldn't develop to stormy conditions," Gardiner said.

IAM believes that inflation and interest rates are in a sustainably lower environment and should remain flat this year, while the rand is stronger than expected. This means the consumer is healthier than expected, which translates directly through to increased earnings making the market by definition cheaper than people predicted.

"Investors are emotionally programmed to get nervous after extended periods of fun in equity markets, and deservedly so. Very few can say they didn't lose money in both the small cap and technology collapses between 1998 and 2001. However, these collapses occurred from enormously overpriced levels... Our market, while up strongly from the ridiculously oversold levels of 2003, is by no means stretched on a forward PE of 13," he said.

According to Gardiner, the scramble for resources by India and China was pushing commodities and should continue to do so. While there would be volatility, commodity demand over the next 10 to 15 years was expected to be strong.

"In addition, we now live in a different country, embraced by the rest of the world. Emerging market funds have been pouring into SA, from two billion rand in 2003, to 29 billion rand in 2004 to 45 billion rand in 2005. You cannot compare SA to the 'isolated 80s', when we were shunned by the rest of the civilised world, or the 'nervous 90s' during our transformation period, when the world gave us no more hope than they give Iraq today. We are a different country now, and therefore the pricing in our market is not in dangerous territory," he asserted.

While a short-term correction was still possible, earnings would come through, which meant equities remained the place to be, he said. Gardiner cautioned however that investors should remember the importance of diversification, saying that it was not a bad time for South Africans to include some offshore exposure in their investment mix.

"Investors must always guard against failing in love. Since falling in love in their personal lives involves monogamy (generally!), people tend to become monogamous with their investment love affairs. Previous such examples where diversification was ignored include small caps, technology stocks (particularly Didata), offshore investment and the dollar. All these love affairs went on too long; investors weren't diversified and tears eventually followed."