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Investment Strategy
Sunday, March 1, 2009
Comparing graph lines

Investing, like many things in life, is subject to certain lessons which will be repeatedly delivered by history until they have been properly learned. Perhaps the most important of these is: Buy assets when they’re cheap - while avoiding what’s deservedly cheap.

“In the current environment of wildly fluctuating markets, daily media reports and knee jerk reactions, it is important to take a step back and look at where we are in a broader context,” notes David Green, Chief Investment Officer of PPS Investments. In this regard, consider the first chart, of asset class valuations for the past several years, produced by one of the proprietary valuation models developed by PPS Investments. Each coloured line represents an asset class’s degree of expensiveness or cheapness compared to its own history and compared to a low-risk cash investment.

“It’s immediately apparent that local bonds and listed property seem particularly expensive at the moment (the orange and green lines),” observes Green. “It’s also clear that local and international equities are in the aggregate looking enticingly cheap (the red and dark blue lines).” Local equities in particular seem on this simple measure as cheap as they did near the start of the previous market upswing. The caveat about avoiding what’s deservedly cheap must, however, be borne in mind. A very cautious increase of equity exposures and the careful selection of individual securities is appropriate as the current deep economic recession runs its course.
The second chart shows the expensiveness or cheapness of the main sectors of the JSE relative to the All Share Index (the black line).

Comments Gree, “It shows clearly that financial stocks (the lighter orange line) have bounced back from a fantastically cheap buying opportunity last year, to more neutral valuations.”
The year-end then saw resources (the red line) looking somewhat attractive after their decline, and industrials (the darker orange line) even looking marginally expensive. Importantly, these graphs show matters in the aggregate. In an asset class or sector which looks expensive, there may of course be individual securities which look quite enticing (and vice versa).
“We still believe that it would be myopic to expect an immediate, smooth or sustained recovery in economies or markets,” he says. However, investors should be mindful of the insidious risk of “reckless conservatism”. Holding too much in cash and too little in equities, for too long, will not see most investors meet their investment objectives.
Given the dictum about buying assets when they’re cheap, we believe that now may be the time to be doing exactly that, while being careful to avoid what’s deservedly cheap.

Copyright © Insurance Times and Investments® Vol:22.3 1st March, 2009
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