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Friday, April 1, 2005
International attractions

While South African equities are still looking positive, one should not ignore the international markets this year, says Mark Appleton, chief investment officer at BJM Private Clients.

“The South African market is not showing the same relative value to the global markets as it did a year ago. Now is a great opportunity to diversify offshore and take advantage of the strong rand, especially as rand weakness is expected during the course of the year,” he says.
Internationally equities are looking far more attractive than bonds and Mr Appleton expects global equities to return between 7% to 9% this year in US Dollar terms. He says economic growth in the US is expected to remain robust but will slow slightly as interest rates gradually increase. The dollar is forecast to remain stable supported by rising interest rates.
China will continue to be the powerhouse with economic growth estimated at around 8%. Interest rates there are expected to be gradually increased and the Renminbi may be revalued next year. “Japan looks particularity cheap at the moment and we expect Asia and China to outperform Europe and the UK with the least favourable returns coming from the US,” says Mr Appleton.
Locally the equity market remains a favourite of the asset classes for superior returns this year, supported by a robust economy. He says inflation is expected to remain under control and the interest rate environment to remain benign. “We are expecting the oil price to come back to more manageable levels as the terror premium declines. Food prices, another major driver of inflation, are expected to remain subdued as international prices remain low. Locally our farmers are expecting to harvest good crops.”
With a benign interest rate environment combined with high fiscal expenditure by government, South Africa is on track to grow in excess of 4% for 2005.
“Although equities performed well last year we do not expect the same levels of growth this year. We believe the equity market will be driven by increasing dividend yields and outperform other asset classes on an after tax basis,” he says.
The yield gap between money market and equities is still relatively narrow with money market returns after tax at around 4,5% and dividend yields just over 3% on average. “We are expecting dividend growth to be over 10%, which will increase yields to just under 4%. Last year the equity market was driven by low interest rates. This year the driving force will be the increase in the dividend yields as earnings increase.”
  BJM’s favourite stocks for 2005 include BHP Billiton, Firstrand, Standard Bank, Absa, Remgro, Tiger Brands, Barloworld, JD Group and Venfin.
“We don’t expect to see listed property performing as strongly as last year but the sector should still offer superior returns compared to the bond and money markets.”
Mr Appleton says that bond yields are expected to rise slightly as a result of funding pressure. “As the government enters a new phase of expansionary policy it could start to increase its debt through the issue of new bonds.”

Copyright © Insurance Times and Investments® Vol:18.2 1st April, 2005
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