Is it time to
sell and go away?
Over the next few
weeks, investors are likely to hear the old saying "sell in May and go
away”, particularly since global markets have rallied so strongly over the past
year (more so the past five years). The local JSE All Share Index is at record
levels (in Rand terms), and so are the benchmark UK FTSE 100 (in Pounds), US
S&P 500 and global MSCI World Equity indices (the latter two in US Dollar
terms). In the UK, US and locally, investors are grappling with whether
equities are overvalued; this is not a simple exercise. Investors need to
consider future company profits, behaviour of other investors, and other
financial variables such as interest rates. But there is no doubt that the
economic backdrop in the US and UK is favourable for equities – inflation is
low, growth is picking up and central banks are in no hurry to tighten their
monetary policy.
Not all markets
have done well
Importantly,
however, a number of key global equity indices are nowhere near record highs.
European equities, as represented by the Eurostoxx 50, are still 16% below the
2008 peak as the Global Financial Crisis and then the Eurozone debt crisis
wreaked havoc with investor confidence and company earnings. The Eurozone’s
economy is only now exiting its doubledip recession, and company earnings are
slowly improving from a depressed base.
So far this year,
Japan’s equities have lost more than 12%, after surging in 2013. But Japan’s
Nikkei 225 Index is still 20% and 61% below the 2008 and 1989 peaks
respectively. Japan’s government is keen on its corporate sector and to spur
greater ownership of Japanese equities by local investors, potentially
providing support going forward.
Emerging markets,
as represented by the MSCI Emerging Markets Index, are 19% below the 2007 peak
in US Dollar terms, and 8% in local currency terms (taking into account that
many emerging market currencies, including the Rand, have fallen against the US
Dollar). Over the past ten years emerging markets have been the star performer
with their higher economic growth rates and, after the 2008 Global Financial
Crisis, stronger government and corporate balance sheets. But over the past
three years, emerging market growth rates have slowed, debt levels have climbed
and companies have been unable to increase profits. Old structural shortcomings
like political uncertainty and reliance on foreign capital have also
resurfaced.
Locally, there are
also pockets of potential value as the JSE’s resources and construction indices
are still below the 2008 peak. Some JSE sectors that are closely linked to the
struggling local economy – such as food producers and retailers – are currently
trading below 2013 peaks. The market has largely been driven by the Rand-hedge
mega-cap shares such as British American Tobacco, SABMiller and Richemont. More
recently, interest-rate sensitive shares, such as banks, have rallied as the
market has toned down its expectations for further rate hikes. To read more on
this article click on the link http://www.fanews.co.za/article/investments/8/general/1133/market-and-economics-commentary-13-may-2014/16009
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