JSE due for a correction

2015-03-08 15:00

The JSE is overvalued and due for a correction over the next few years – the days of double-digit returns on investment are over, investment portfolio managers told City Press this week.

Most predict a real return of 1% to 2% (after inflation) on the market as a whole over the next five years.

Clyde Rossouw, a portfolio manager at Investec Asset Management, said: “Looking at the overall domestic market and the returns likely to be achieved, the South African stock market looks to be fully priced. In our view, a real return of no more than 1.4% per annum is likely for the next five years, which is not an exciting outcome.”

Rossouw said that, over the past 24 months, Investec had become increasingly concerned about the overall valuation level of the market.

“While excess liquidity and investor exuberance have driven domestic equities higher, the market has struggled to gain further upside traction over the past six months,” he said. “We have seen sideways moves with increased volatility.

“On a historical price-to-earnings ratio of 17x, the equity market as a whole is not cheap. Current prices are being driven by investors willing to pay up for anything with a hint of growth.

“While nobody can predict when the music will stop, we remain cautious about the possibility of capital loss from these market levels,” added Rossouw.

Vanessa Hofmeyr, a portfolio manager at Citadel Investment Services, agreed.

“We have got quite comfortable and used to double-digit returns,” Hofmeyr told City Press this week.

“We have a big change to get our heads around.”

Hofmeyr said real returns on investment could be between 1% to 2% over the next five years.

Pan African Capital CEO Iraj Abedian said the general business cycle shifted from the “supercycle of growth” to the prevailing “down phase of the business cycle”.

“In such environments, the fund managers cannot rely on the power of the rising tide to lift all boats,” he said. “However, we need to avoid broad-brushing and should navigate among a few relevant critical variables.”

Abedian said the key issues to take into account included the need to manage regional exposures, the need for sectoral balancing of portfolios, the fact that a company’s historical performance was not necessarily a good indicator of its forward returns and that cross-variations of foreign exchange rates were in full volatility.

Geoff Blount, the MD of Cannon Asset Managers, said he agreed that the market was overpriced. He expected a correction in the next two years, but said, looking at a five-year forecast, he predicted real returns would be around 5.5%.

Blount said long-term investors should still make decent returns, but short-term investors looking to play the market needed to be careful.

Rossouw said: “Selective stock picking will become increasingly important to seek out those opportunities that could continue to provide dependable real returns with less downside risk.

“Our preference is for shares with a high cash flow, high dividend yields and a diversified earnings base.”

Blount said: “Since 2003, we have had phenomenal equity-market returns. We are definitely not going to see that going forward.

“The market is not outrageously expensive; it’s not bubble-like. There are parts of the market that are bubble-like.”

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